Here in the real estate world we often hear the terms “marketability” and “insurability” of title. And many of us do not understand the precise meaning of these words. That may just be because the meaning is not precise at all.
The Virginia court defined the meaning of “marketability” of title in the 1963 Virginia case Madbeth, Inc. v. Weade. In that case, the Defendant was under contract to purchase a plot of land from the Plaintiff. The title examiner found one minor problem: no one knew what the boundary lines were.
The 2-acre plot was part of a larger tract consisting of 26 acres, whose owner, George W. Almond, would convey portions of the larger tract from time to time. The descriptions of the smaller plots conveyed were “vague and indefinite”. This particular plot was described as a parcel “bounded on all four sides by other land of George W. Almond.” Helpful description, right? It turns out it was impossible to determine the plot’s boundaries and easements contained therein by examining the other conveyances from the original 26 acre parcel.
The Court found that title to the 2-acre parcel was unmarketable. It noted:
“A marketable title is one which is free from liens or encumbrances; one which discloses no serious defects and is dependent for its validity upon no doubtful questions of law or fact; one which will not expose the purchaser to the hazard of litigation or embarrass him in the peaceable enjoyment of the land; one which a reasonably well-informed and prudent person, acting upon business principles and with full knowledge of the facts and their legal significance, would be willing to accept, with the assurance that he, in turn, could sell or mortgage the property at its fair value.”
In short, marketable title:
1) has no serious defects;
2) is one which would not expose the buyer to litigation or embarrass him in the peaceful enjoyment of his property, and
3) is one that the purchaser could sell to an informed seller at fair value, and that that seller could in turn sell to a new purchaser at fair value.
If there is a question of marketability in a transaction, a buyer should consult with legal counsel.
Whereas marketability is concerned with the ability for an owner to peacefully enjoy and reasonably market his or her property, insurability deals with whether a title insurance company is willing to provide insurance coverage against any known defects in the property.
Indeed, title insurance companies are willing to insure over known defects in a property, provided that the defect is slight and the risk that the defect would result in a title claim is low. For instance, if an owner paid off a mortgage on a particular property in 1970, but a release of the mortgage was never filed in the land records and the title company is unable to obtain the release prior to settlement, a title insurance company may be willing to insure the property nevertheless. The risk that the unreleased mortgage would pose an issue for a future owner is low, and fixing the defect may be costly and time consuming.
When considering whether title is insurable, then, a title insurance company will weigh the risk that the defect will result in a title claim with the difficulty of fixing the title defect. Such determinations are subjective, and while one title insurance company may decide to insure over a particular title defect, another title insurance company may refuse to insure over that same defect.