What quality of title are you getting in that real estate contract?

The essence of a real estate contract is an exchange of (i) cash from the buyer for (ii) some conveyance of title, and some quality of title from the seller.  Certainly, there are many other provisions of a contract that are important and we review each of these, but the exchange of money for title to real estate is the core transaction taking place.

When I review a purchase contract, the first place my eyes go, is asking “what is the standard of title, the quality of title that the seller has to convey to the buyer.”  The standards in the “industry” are markedly divergent on this issue (there is no legal requirement of the minimum quality of title to be conveyed; it is a matter of contact).  The most common standards are:

o   Good, clear and marketable title, subject to “no” exceptions.  This quality of title basically does not exist for most properties located in an urban area because of subdivision covenants, utility easements, and other standard encumbrances.

o   Good, clear and marketable title subject to such exceptions as will not interfere with the use and enjoyment of the property for its intended use (e.g., residential  retail, manufacturing, etc.).  This is the most common form of residential title provision and this is the provision presently in the standard Cincinnati Area Board of Realtors contract.  As a practical matter this provides the buyer the right to object to title matters through the closing.

o   The Buyer checks the quality of title and within a number of days approves the quality or rejects the quality, terminating the contract.  If he does not reject title exceptions within “x” number of days, he is bound to accept them.  This is the type of title exception most common in commercial real estate contracts.

These provisions are fundamentally different standards that, depending on the circumstances, could materially affect the buyer’s rights under the contact.  (There are other standards as well; each contract may be different.)

I once appeared before a Judge who posited to me that Ohio’s Marketable Title Act,  R.C. §5301.47, et seq., dictates as between a buyer and a seller the quality of title that must be conveyed at the closing.  This is unquestionably a misapplication of the statute.  Ohio’s Marketable Title Act defines marketable title as an objective standard.  This may be helpful for interpreting contract provisions relative to the quality of title to be conveyed (i.e., if the parties promise one another that marketable title is what will be delivered, or perhaps the standard in the absence of a contractual provision), but the contract itself will define what the parties have promised one another and are therefore obligated, respectively, to deliver and accept.

Each buyer and seller should carefully consider the consequences of the title covenants in a contract, because those covenants will dictate how they must proceed thereafter and their relative rights and responsibilities under the contract.  This typically is the centerpiece of the relationship under a real estate contract.