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Nelson v. Anderson

    Brief Fact Summary.

    Defendant refused to close on the purchase of Plaintiff’s home because it violated a restrictive covenant even though the title insurance company assured that it would insure the violation for Defendant and subsequent purchasers. Plaintiff sold the home to another buyer for a lower price and sued Defendant for damages. Defendant counterclaimed for recovery of the deposit. The trial court granted Defendant summary judgment, holding that Plaintiff failed to deliver unencumbered title. Plaintiff appealed.

    Synopsis of Rule of Law.

    (1) A violation of a restrictive covenant may render title unmarketable. (2) Insuring against a defect in title does not cure the defect.

     

    Facts.

    Nelson (Plaintiff) contracted to sell his home to Anderson (Defendant). Plaintiff was to deliver a warranty deed conveying marketable title, free and clear of all encumbrances except those mentioned in the contract. The title insurance company’s report revealed that the property violated a restrictive covenant that required all the lots in that subdivision to be set back at least ten feet from the property lines of adjoining owners. Plaintiff obtained written assurances from the title insurance company that it would insure the violation for Defendant and subsequent purchasers. Defendant nevertheless refused to close and bought another property instead. Plaintiff sold to another buyer but at a lower price. Plaintiff sued for damages. Defendant counterclaimed for recovery of the deposit. The trial court granted Defendant summary judgment, holding that Plaintiff failed to deliver unencumbered title. Plaintiff appealed.

    Issue.

    (1) Whether violation of a restrictive covenant renders title unmarketable. (2) Whether insuring against a defect in title cures the defect.

    Held.

    (1) Yes. The trial court’s ruling is affirmed. A violation of a restrictive covenant may render title unmarketable.(2) No. The trial court’s ruling is affirmed. Insuring against a defect in title does not cure the defect.

    Discussion.

    Marketable title must be reasonably secure against the hazard, annoyance, and expense of future litigation. Marketable title need not be beyond all doubt, but it must be free of doubt or cloud that would affect the value of the property. Here, Plaintiff delivered title that was encumbered by the violation of a restrictive covenant. The residence was constructed closer to the northern boundary than was allowed. The covenant at issue runs with the land and binds every lot in the subdivision. Thus the violation gives every lot owner in the subdivision the right to sue to enforce the covenant. This adversely affects the property’s value. A reasonable person would refuse to accept such a title because of the fear of future litigation.Indemnification against future litigation over a title defect might persuade a purchaser to accept a defective title, but the court cannot compel a skeptical buyer to close on the transaction. Here, Defendant bargained for a marketable, unencumbered title. The covenant was an encumbrance on the land, and the insurance did not change that fact. Therefore, Defendant justifiably refused to close.


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