The Ohio standard for “marketable title”
The standard for real estate title is, without putting too fine a point on it, pristine. This is true not only in Ohio, but but in every state.
Indeed, one really could put a fine point on it. Nearly any title defect can be a “cloud” on title that impairs its marketability.
Some minor title defects are OK
As is addressed here, some title defects can be “papered over” with title insurance; others are made acceptable under the marketable title act or standards and customs that allow title attorneys and title insurance companies to ignore minor defects. Both of these solutions can allow a transaction to close.
But the standard in title is, essentially, perfection. A buyer is not going to buy, a lender is not going accept a mortgage to secure a loan, and a title insurance company is not going to insure matters that are a “cloud” to title to real estate.
An unreleased Land Installment Contact “clouds” title
I recently helped a client who had “sold” their home on Land Installment Contract. After three years of payments, the buyer was to pay the balance of the Land Installment Contract, a “balloon payment,” and then get a deed conveying title to the property. Unfortunately, the buyer defaulted and moved out of the property at the end of the term.
[Is the buyer liable for monetary damages in such circumstance? Probably. But the cost to pursue those claims many times exceeds the recovery. Many sellers are wise to just pack their bags and move on to the next opportunity.]
The seller was able to quickly re-sell the property to another buyer, but the recorded land installment contract constituted a “cloud” on title, making title unmarketable. When the closing was set to occur, the title insurance company for the lender and buyer refused to pass on the title.
How do you clear title “clouds”
There are two ways to clear a “cloud” of this type: (a) buyer and seller jointly execute a notarized document in recordable form voluntarily terminating the Land Installment Contract or (b) a signature of a Common Pleas Court Judge in an appropriate proceeding extinguishing the Land Installment Contract and then the passage of an additional 30 days to avoid an appeal of that decision (or the exhaustion of appellate rights all the way through the Ohio Supreme Court).
Other than these two alternate steps, there is no “shortcut” to clear and marketable title to defeat a Land Installment Contract that is of record.
And the judicial proceedings could take 12 to 36 months, or even longer, to clear the title problems.
Many title problems can only be addressed in the same way: Either the party who has a colorable claim must sign a recordable instrument releasing the claim or a Judge, after appropriate due process of judicial proceedings, signs an Order wiping away the title claim. This can be an extended and expensive undertaking.
How can an owner avoid the fate of a “clouded” title?
How can a seller avoid the fate of an impaired title?
Second, once you own property that has clear title, don’t sign and record a Land Installment Contract clouding the title. (Or, get a significant enough up-front down payment make it worth the while of judicially extinguishing the buyer’s interest at a later date if he defaults.)
Similarly, granting voluntary but poorly-thought-through covenants, easements, mortgages and other instruments can foul one’s real estate title and make the title either unmarketable or less valuable than otherwise might be the case.
This blog entry addresses problems that an owner causes by his own signature. But other title problems can arise from, for example, mechanics liens arising from unpaid claims of a contractor on real property, defects that existed when an owner took title to property, and affidavits that another party places of record unilaterally declaring an interest in your land. These, too, may require one of the two steps noted above to clear, but they are not as easily avoided as ones created by the owner’s own hand.
The essential message of this blog entry is that title is a delicate thing, and can be “clouded” or impaired easily. Thus, don’t voluntarily sign documents — even if they might initially seem like a good idea — that will constitute a cloud on title, at least not without careful consideration. Cautiously think through the impact of documents that you voluntarily elect to place of record.