The object of a real estate transaction is the transfer of legal title to the property. This is done by a “deed” from the seller to the buyer. There are a number of different kinds of deeds depending on the title warranties the seller can or is willing to make. Generally, residential real estate is transferred with what is called a “statutory warranty deed.” If something less that a statutory warranty deed (quit claim, bargain and sale, special warranty deed, trustee deed, etc.) is proposed, the buyer should be advised to seek legal counsel.
A “warranty deed” is a deed in which the seller guarantees (warrants) the chain of title and their ability to transfer full rights in the property. In a statutory warranty deed, the warranty is set out in statute and, therefore, clearly defined. In Oregon, as in the rest of the Western United States, the title to real property is usually insured at the time of transfer. Title insurance protects both the buyer and the seller.
Standard real estate forms contain “title insurance” clauses. For the most part, these clauses contain “contingencies with cure” provisions. A contingency with a cure provision is one in which the buyer can object to the state of the title but cannot cancel the contract if the objections can be cured by the seller. Objection and cure deadlines are common and must be understood and met. An agent should always know and explain these deadlines to their client.
In order to object to the state of the title, the buyer must know the state of the title. That is the purpose served by the preliminary title report issued by the title insurer named in the contract. The seller’s prompt delivery of a preliminary title report and copies of any covenants, conditions or restrictions (CC&Rs) is an important term of any title contingency clause. The report and CC&Rs will tell the buyer of any defects, exceptions or limitation affecting the seller’s title to the property.
For the most part, the legal affect of title defects, exceptions and limitations are beyond the scope of the real estate licensee’s expertise. By statute, a real estate licensee has no duty to investigate “the legal status of the title.” That does not mean a licensee can simply ignore the preliminary title report. What it means is that the agent is not required to have legal knowledge. Most title contingency clauses have an express provision stating that agents are not qualified to advise clients on the legal status of title. Such clauses can be very helpful when reviewing the title report and CC&Rs with clients.
Title contingencies in a residential real estate sale forms are usually “review and approval” type contingencies. Such contingencies allow the buyer to object to anything in the report or CC&Rs the buyer finds “unacceptable.” This manner of handling title objections allows the buyer great latitude to object to anything found in the report or CC&Rs, but does not allow the buyer to use the title contingency as a “weasel clause.” That is the case because of the duty to perform contracts in good faith. Click here for a detailed discussion of the obligation of good faith in contract performance.
Good faith performance limits the buyer’s ability to terminate the contract based on the preliminary title report or the CC&R’s. Title and CC&R objections must be “reasonable.” Reasonableness in the law is judged on an objective standard. An objection is reasonable if a hypothetically reasonable person in the same circumstances might object to the same thing. Thus, an easement for a 5KMV interstate electrical transmission line might reasonably be objected to, but a common utility easement for the house or even the subdivision would not.
CC&R provisions are fertile grounds for objections under title contingencies. That is the case because they limit the owner’s use of their own property. So, for instance, a CC&R provision demanding review and approval by an architectural control panel might, at the preliminary title stage, be reasonably objected to by a buyer who intends extensive remodeling. The same would be true of pet restrictions, RV parking bans and any of a host of other common limitations found in CC&Rs.
Objections to preliminary title reports and CC&Rs often cannot be cured and, therefore, can cause deals to fail. It is for that reason that title objection deadlines are typically very short – often as little as five days. The short deadline puts pressure on title report and CC&R review. Although failure to object to specific items usually results in waiving the objection, it does not relieve the seller of the obligation to convey “marketable title.” That obligation – to deliver marketable title – is usually contained in a separate “deed” clause, independent of the title contingency clause.
Marketable title is a term of art. Courts understand that the title to real property is rarely, if ever, perfect. Prior conveyances, divorces, deaths, conflicting descriptions, misspellings and a host of other defects make the state of legal title less than completely certain. To compensate, courts demand that the seller convey marketable title. Marketable title need not be free of all defects. Instead, the title must be “free of all reasonable risks of attack.” Obviously, such an assessment is far beyond the expertise of a real estate licensee. A claim of unmarketable title is, therefore, always a matter for attorneys.
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