Brief Fact Summary.
Plaintiffs sued, claiming that Defendants breached the purchase agreement and claiming the $50,000 earnest money deposit that Defendants put into escrow plus interest as liquidated damages for the bridge. The trial court ruled in Plaintiffs’ favor.
Synopsis of Rule of Law.
A buyer of real estate may refuse to close if the seller’s title is unmarketable.
Kenneth R. Lape and Barbara Gsand Lape owned 148 acres of land known as Oakmont Farm. In 1994, Plaintiffs conveyed 48 acres of their land to Dr. Hamilton Moses III and Alexandra G. Moses. The deed contained an easement granting the Moseses a line-of-sight easement. The easement restricted Plaintiffs from building structures visible from the Moseses home. In 2000, the Lapes’ trustees (Plaintiffs) contracted to sell ninety-nine acres of their remaining land, known as Laurel Ridge Farm, to Audrey Lea Haisfield and Laurel Ridge, LLC (Defendants). Paragraph 14 of the purchase agreement stated that Plaintiffs would convey the property free of encumbrances but, subject to restrictive covenants that did not render title unmarketable. Defendants gave an earnest money deposit of $50,000, which Plaintiffs were entitled to take if Defendants defaulted. The parties agreed to close on June 30, 2000. On June 29, however, Defendants discovered that Laurel Ridge Farm was subject to the line-of-sight easement previously granted to the Moseses. Defendants argued that the easement rendered title unmarketable and, pursuant to the purchase agreement between Defendants and Plaintiffs, Defendants gave Plaintiffs sixty days to cure the defect. She also asserted that, pursuant to Paragraph 14, she was entitled to refuse to close the transaction and to collect her $50,000 deposit if Plaintiffs failed to cure the defect. Plaintiffs disagreed that the easement rendered title unmarketable and sued, claiming their right to the $50,000 deposit as liquidated damages. Defendants counterclaimed, arguing that Plaintiffs lacked marketable title and demanding the return of the deposit. The trial court held that the line-of-sight easement did not render title unmarketable and granted Plaintiffs a judgment of $50,000 plus interest.
Whether a buyer of real estate may refuse to close if the seller’s title is unmarketable.
Yes. The trial court’s ruling is reversed. A buyer of real estate may refuse to close if the seller’s title is unmarketable.
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.View Full Point of Law
Under Paragraph 14 of the purchase agreement, if an easement encumbering Laurel Ridge Farm renders title unmarketable, Plaintiffs are in breach of the agreement and Defendants is entitled to terminate it. Marketable title is one, which a reasonable purchaser would be willing to accept. It exists if the property is reasonably free from liens or encumbrances, lacks serious defects, and does not expose the purchaser to the risk of litigation. But the mere existence of a lien or encumbrance will not entitle a purchaser to terminate the agreement. If the encumbrance is of such a character and amount that the unpaid purchase money can be used to remove it, such as a tax or judgment lien, the purchaser cannot rescind the agreement. The amount of this type of encumbrance must be definite, lesser in value than the unpaid purchase price, presently payable, and its existence must not be subject to doubt or litigation. Furthermore, the purchaser cannot terminate the agreement if the easement is an open, visible, physical encumbrance, such that it would have factored into the purchase price of the property. Here, unlike a tax or judgment lien, the line-of-sight easement is not definite. Thus, the unpaid purchase money cannot be applied to remove it. Furthermore, the line-of-sight easement is not an open, visible, physical encumbrance on the property. It therefore did not factor into the fixing of the purchase price. Accordingly, the line-of-sight easement renders title to Laurel Ridge Farm unmarketable. The trial court erred in finding Defendants in breach and ordering a judgment of $50,000 in Plaintiffs’ favor.