In order for lenders to maximize the recovery value of real estate collateral, it is crucial that any marketability issues existing with respect to the real estate title are identified and resolved prior to closing.  Marketability issues are issues that will make the real estate difficult or impossible to sell if the lender must liquidate the collateral in the future.  Generally speaking, a "marketable title" must include both the legal ownership and right to occupy the property, and must also be free of actual defects, reasonable doubt and probable litigation.  If title is considered unmarketable at the time of liquidation, the lender may have to significantly discount the sale price for the real estate in order to find a willing buyer, or may be unable to sell the real estate at all without expending substantial funds to resolve the marketability issues.

When real estate is the primary collateral or is otherwise significant collateral for a loan, title insurance will almost always be obtained.  Title insurance provides coverage with respect to many issues; one of the most important covered risks is "Unmarketable Title."  For a loan policy of title insurance issued on the ALTA 2006 form, which is currently available in every state but Florida, New Mexico and Texas, "Unmarketable Title" means "Title affected by an alleged or apparent matter that would permit a prospective purchaser or lessee of the Title or lender on the Title or a prospective purchaser of the Insured Mortgage to be released from the obligation to purchase, lease, or lend if there is a contractual condition requiring the delivery of marketable title."

Clearly, the title insurance definition of "Unmarketable Title" doesn't help a lender to determine whether every issue disclosed in the title commitment might present a marketability concern. In certain situations, the parties would need to look to applicable law to determine whether courts had found that particular matters rise to such a level as to make title to a property unmarketable.  Other scenarios, however, as may be disclosed by the exceptions in the title commitment (usually Schedule B-II) for which the title insurer provides no coverage, should always raise  marketability concerns and require further analysis.

For example, if the title commitment includes an exception for lack of access to the property, the lender should be concerned that the lack of a legal right of access to the property would make it impossible to sell (access is separately insured by the title policy, but also presents a marketability concern).  In such a case, the lender should require the borrower to obtain an insurable legal right of access prior to closing.  Other potential marketability issues that might be disclosed by review of a title commitment include rights of third parties who are not part of the loan transaction, such as leasehold interests or potential outstanding ownership interests in the property, including adverse possession claims, incorrect conveyances or improperly probated estates.

                Essentially, conditions that a typical buyer would be unlikely to accept without a substantial discount in the purchase price should raise the concern that there might be a marketability issue. Many marketability concerns raised by a title search can be addressed; the prudent lender should make sure that they are addressed before the loan closes.

                For more information on marketability of title and other title insurance related matters, contact Amy at abrownstein@starfieldsmith.com, or 215-542-7070.