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Issue  76  Article  146
Published:  11/1/2001

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"Marketable Title"
Chris Burti, Vice President and Legal Counsel

Justice Stewart, concurring in Jacobellis v. Ohio, 378 U.S. 184, (1964) authored the oft quoted definition of hard core pornography. He said: "I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description, and perhaps I could never succeed in intelligibly doing so. But I know it when I see it . . ."

Marketable title seems to be a similar concept. When the question has come up in modern appellate decisions, our courts have repeatedly relied upon Pack v. Newman, 232 N.C. 397, 61 S.E.2d 90 (1950), where Justice Ervin stated that a " 'marketable title' is one free from reasonable doubt in law or fact as to its validity", quoting Winkler v. Neilinger, 153 Fla. 288, 14 So.2d 403. This definition is not a polar star which attorneys may rely upon for guidance when descending into the depths of the deed vault with this issue in question. One may surmise that like the esteemed jurist, title attorneys must recognize marketable title when they see it.

Marketable title is an essential element in most contracts for the sale of land; so much so, that our Supreme Court has said that it is implicit unless the contract provides otherwise. In Burkhead v. Farlow, 146 S.E.2d 802, 266 N.C. 595, (N.C. 1966), the Court stated that "in the absence of an agreement to the contrary, merchantability is implied in a contract to convey land, 'the acceptance of an offer to sell land making no specifications or limitations as to title is not made conditional by including a provision requiring 'marketable title.' 1 Corbin, Contracts 86 (2d Ed. 1963). Cases supporting this proposition are collected in Annot., 149 A.L.R., supra at 211-213 and in 1 Williston, Contracts 78 (3d ed. 1957), wherein it is stated:

'Sometimes an acceptor from abundance of caution inserts a condition in his acceptance which merely expresses what would be implied in fact or in law from the offer. As such a condition involves no qualification of the acceptor's assent to [266 N.C. 599] the terms of the offer, a contract is not precluded. Thus an offer to sell land may be accepted subject to the condition that the title is good, for unless the offer expressly specifies that the offeree must take his chance as to the validity of the title, the meaning of the offer is that a good title will be conveyed.'"

Clearly then, marketable title is the standard of all contracts to sell land unless the parties expressly agree to the delivery of title of a lesser quality. It would seem that there would be a great deal of guidance from the courts as to what defects must be considered acceptable in fulfilling the obligation to deliver marketable title under a contract to sell land. Oddly enough, we are provided very little useful direction by appellate decisions or commentators in determining an answer to this question when it arises. A decision antedating Pack, Richardson v. Greensboro Warehouse & Storage Co., 223 N.C. 344, 26 S.E.2d 897, (1943) gives a nudge toward providing limits to the broad definition enunciated in Pack. There the Supreme Court stated that " it is implied in a contract to convey land, unless differently agreed, that the seller must give a good title. But it is not implied in law or, as far as we know, required by any controlling custom, that attorneys of plaintiffs' selection should be designated to pass upon the title, and that their adjudication thereon should be final, and possibly have the effect of annulling the contract. The Court refined this statement in Burkhead as follows:

"Although the law implies an obligation on the part of the vendor to furnish a good or marketable title, it does not imply any obligation to furnish a title that will be satisfactory to the vendee or his attorney or one that he will be willing to accept. The fact that the title is not satisfactory to a particular purchaser or his attorney does not necessarily mean that the title is, in fact, not marketable. " Burkhead v. Farlow, 146 S.E.2d 802, 266 N.C. 595, (N.C. 1966)

While this statement does not move us very far along the path of discovering what marketable title is, at least we know by implication that it does not have to be perfect and unblemished. It is interesting to discover that North Carolina cases holding that a certain defect does not affect marketability of title are extraordinarily rare. What is far more common is finding cases that hold that an alleged title defect is or is not actually a defect in legal title.

Blanchard v. Ward, 244 N.C. 142, 92 S.E.2d 776, (1956), The court determined the status of a vested remainder subject to open and avoided enforcing a contract because of a contingent remainder interest as a matter of law.

Williamson v. Avant, 21 N.C.App. 211, 203 S.E.2d 634, (1974), A division deed among heirs is not subject to a subdivision ordinance and did not require approval. The contract was enforceable as a matter of law.

Marriott Financial Services, Inc. v. Capitol Funds, Inc., 23 N.C.App. 377, 209 S.E.2d 423, (1974), A statute which makes it a misdemeanor to use a description of land in any contract of sale, deed, or other instrument of transfer by reference to a subdivision plat that has not been properly approved or recorded does not expressly or impliedly render a deed either void or voidable. The contract was enforceable as a matter of law.

Oxendine v. Lewis, 252 N.C. 669, 114 S.E.2d 706, (1960), Repugnant clauses in will voided, and attempt to create a life estate resulted in the conveyance of fee simple. This doctrine is now inapplicable to deeds executed after January 1, 1968 by statute. The contract enforcement was avoided as a matter of law.

Waters v. North Carolina Phosphate Corp., 50 N.C.App. 252, 273 S.E.2d 517, (1981), The Oxendine rule of construction was applied to void a reverter clause. This court held that the rule that visible easements do not constitute encumbrances that breach the covenants of title in a deed is equally applicable to contracts to convey. The directed verdict of the trial court, avoiding enforcement of the contract was reversed and remanded for trial in order to determine the facts.

Waters v. North Carolina Phosphate Corp., 310 N.C. 438, 312 S.E.2d 428, (1984), The Supreme Court overruled the application of the ‘visible easements’ because of the existence of a recorded easement. The Court stated that a private right-of-way over land subject to the contract to sell constitutes such a burden upon land that vendee is under no obligation to accept title subject to easement with the court pointing out there was no beneficial purpose to the land it crossed. The court also ruled that an easement that materially affects or interferes with full use or enjoyment of land constitutes an encumbrance. Either rule would have sufficed to produce the same outcome. This leads one to wonder why, if the former was enunciated as a rule of law, the Court found it necessary to use the latter to sustain the trial court’s findings of fact. Enforcement of the contract was, apparently, avoided on a mixture of law and fact.

Nick v. Baker, 125 N.C.App. 568, 481 S.E.2d 412, (1997), This is actually a deed warranty case, but arose out of an allegedly uncanceled deed of trust. Summary judgment was reversed even though evidence appeared to be uncontroverted that the deed of trust was satisfied.

Hilliard v. Thompson, 81 N.C.App. 404, 344 S.E.2d 589, (1986) Failure of wife to join in deed would result in unmarketable title. The contract enforcement was avoided as a matter of law.

A review of these cases, and many others that have achieved appellate review, leads to the following observations. When the record on appeal is sufficient, the appellate court will determine the legal effect of the defect that is alleged to make the title unmarketable. When the record is not sufficient for a ruling as a matter of law, the appellate bench will remand for the purpose of finding such facts. In the limited time permitted for preparation of this article, we did not find a case that considered evidence on what defects would be considered as affecting whether a title should be regarded as being "free from reasonable doubt in law or fact as to its validity". Many of these cases cite no North Carolina law as the basis for the court’s ruling. Waters went up on appeal three times. It could be argued that the very fact that there is no North Carolina case determining the status of an alleged defect, in itself creates a reasonable doubt as to the title’s validity. Until we find such a case, it may be reasonable to conclude that the unarticulated rule in North Carolina is that marketable title may be defined as legal title in law and fact where record title reveals a questionable defect. If this were to become the enunciated rule, marketable title would be analogous to title by adverse possession. As such, there would be no marketable title when a questionable defect appeared in an examination until a final judgment of a court of competent jurisdiction determined the question. As it is, we are left with the Pack definition which may be fairly paraphrased in Justice Stewart’s memorable phrase; "I know it when I see it . . ." This has been the applicable test and seems to work, at least until there is enough disagreement, reasonable or otherwise, as to the validity of the title to motivate two parties to litigate the issue.

This uncertainty in defining marketable title translates into difficulty for title insurers who are requested to insure over many questionable defects in record title. One of the fundamental protections afforded by title insurance is indemnity for losses sustained by reason of unmarketability of title. Often everyone agrees that the defect is extremely unlikely to give rise to claim by any party who might claim rights arising out of the defect. If the insurer agrees to insure without excepting to the existence of the alleged defect in the policy, then the mere existence itself of the defect may give rise under the policy’s insuring provisions against unmarketability. The better practice is to take exception to the existence of the defect and provide affirmative coverage for loss or damage arising from parties claiming rights as a result of the defect. This will provide indemnity for the insured in the event that someone else claims rights in the property. In addition, it will avoid exposing the title insurer to the risk that it might have to fund a contract dispute where marketable title is used as a bargaining chip.

It seems that any discussion of marketable title ought to include, at the very least and even if only in passing, a nod to NCGS Chapter 47B, The Real Property Record Title Act. Time and space do not permit an extensive discussion of this legislation here. However, setting out the exceptions enumerated in NCGS Sec. 47B-3 (emphasis added) may prove illuminating for those practitioners who assume that a 30 year title examination is sufficient in all transactions.

47B-3. Exceptions

Such marketable record title shall not affect or extinguish the following rights:

(1) Rights, estates, interests, claims or charges disclosed by and defects inherent in the muniments of title of which such 30-year chain of record title is formed, provided, however, that a general reference in any of such muniments to rights, estates, interests, claims or charges created prior to such 30-year period shall not be sufficient to preserve them unless specific identification by reference to book and page or record be made therein to a recorded title transaction which imposed, transferred or continued such rights, estates, interests, claims or charges.

(2) Rights, estates, interests, claims or charges preserved by the filing of a proper notice in accordance with the provisions of G.S. 47B-4.

(3) Rights, estates, interests, claims or charges of any person who is in present, actual and open possession of the real property so long as such person is in such possession.

(4) Rights of any person who likewise has a marketable record title as defined in G.S. 47B-2 and who is listed as the owner of such real property on the tax books of the county in which the real property is located at the time that marketability is to be established.

(5) Rights of any owners of mineral rights.

(6) Rights-of-way of any railroad company (irrespective of nature of its title or interest therein whether fee, easement, or other quality) and all real estate other than right-of-way property of a railroad company in actual use for railroad purposes or being held or retained for prospective future use for railroad operational purposes. The use by any railroad company or the holding for future use of any part of a particular tract or parcel of right-of-way or non-right-of-way property shall preserve the interest of the railway company in the whole of such particular tract or parcel. Operational use is defined as railroad use requiring proximity and access to railroad tracts. Nothing in this section shall be construed as repealing G.S. 1-44.1.

(7) Rights, interests, or servitudes in the nature of easements, rights-of-way or terminal facilities of any railroad (company or corporation) obtained by the terms of its charter or through any other congressional or legislative grant not otherwise extinguished.

(8) Rights of any person who has an easement or interest in the nature of an easement, whether recorded or unrecorded and whether possessory or nonpossessory, when such easement or interest in the nature of an easement is for any one of the following purposes:

a. Flowage, flooding or impounding of water, provided that the watercourse or body of water, which such easement or interest in the nature of an easement serves, continues to exist.

b. Placing and maintaining lines, pipes, cables, conduits or other appurtenances which are either aboveground, underground or on the surface and which are useful in the operation of any water, gas, natural gas, petroleum products, or electric generation, transmission or distribution system, or any sewage collection or disposal system, or any telephone, telegraph or other communications system, or any surface water drainage or disposal system whether or not the existence of the same is clearly observable by physical evidence of its use.

c. Conserving land or water areas pursuant to a conservation agreement or preserving a structure or site pursuant to a preservation agreement under Article 4 of Chapter 121 of the General Statutes.

(9) Rights, titles or interests of the United States to the extent that the extinguishment of such rights, titles or interest is prohibited by the laws of the United States.

(10) Rights, estates, interests, claims or charges created subsequent to the beginning of such 30-year period.

(11) Deeds of trust, mortgages and security instruments or security agreements duly recorded and not otherwise unenforceable.

(12) Rights, estates, interests, claims or charges with respect to any real property registered under the Torrens Law as provided by Chapter 43 of the General Statutes of North Carolina.

(13) Covenants applicable to a general or uniform scheme of development which restrict the property to residential use only, provided said covenants are otherwise enforceable. The excepted covenant may restrict the property to multi-family or single-family residential use or simply to residential use. Restrictive covenants other than those mentioned herein which limit the property to residential use only are not excepted from the provisions of Chapter 47B.

Title to lots in land that has been in development for more than thirty years can clearly benefit from this Act. However, undeveloped land has a reasonable probability of bearing title issues not extinguished by the Act. This concern should apply to recently developed land as well, if the examiner is not relying on the examination of the base title by a competent and reputable law firm.

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