Contracts used by Realtors ( myself included) in Williamsburg and Hampton Roads , Virginia provide several important clauses relating to the quality of title a seller is obligated to deliver to the buyer, and the type of deed (warranty really) by which the seller will transfer and guarantee title to a buyer. As a result of the economic climate more and more sellers are institutional (BANKS primarily) sellers. More often than not these institutional sellers want to limit their liability because they only owned the property for a short period and acquired it under adverse or unusual circumstances. This primer is intended to answer the FAQ’s I get as a result.
As you read through the FAQ questions and answers below, or seek to determine the answer to your particular question, please bear in mind two factors: first, you should only accept a deviation from the standard and customary contract title language and deed warranty when you have an institutional seller (and really want the house despite the risk) – there is simply no reason why you should accept these changes with a different category of seller; and, second, this post is no substitute for a face to face meeting with a lawyer so this is to be considered a guide, not legal advice applicable to any given situation and set of facts.
What does “marketable title” mean?
Title simply means ownership. While the Virginia Supreme court’s definition is actually more complex, it has said in part that “marketable title” is 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. In layman’s terms, it is good title, and there are no problems that would affect your ability to re-sell it.
What does the VAR contract language “render the title unmarketable” mean?
I’m not sure why VAR couldn’t have taken the normal approach and just said “marketable title” like the rest of the world but I suppose the phrases are functionally equivalent in context (technically the VAR contract carves out possible exceptions and problems, like easements, and says they are okay as long as they do not render title unmarketable).
What does the language insurable title mean?
Simply stated, insurable title is title that a title insurance company will insure. Note, however, that title insurance companies might insure against defects that would render title unmarketable. An old, unreleased, deed of trust is one example (not a good one perhaps because they will rarely insure over unreleased deeds of trust, but you get the point — and for enough money they will insure anything I suppose). This is complicated because a title policy can contain exceptions, which raises the question whether it is “insurable” if a policy is issued but contains exceptions that are unmarketable in nature.
Is it okay if the seller’s addendum removes or changes the marketable title language?
Honestly no. If this is changed in the contract the buyer is obligated to buy even if title is bad. If the seller just flat out refuses to bend on this deal point, and the buyer just has to have the property, then you have three choices: (a) take significant risk, (b) do a title search and get a title insurance binder (a binder is a written promise to insure) before the contract is ratified (or during a contractual due diligence period) – but problems could still come up between the search and then closing and so that should be covered as well, (c) try and counter with a counter/addendum expressly providing that if title is not “clear, marketable and insurable then either Buyer or Seller has a right to cancel the contract.” With this language the seller is not at risk of being in breach should there be a problem but the buyer is also protected. Honestly, if a seller won’t accept that you just need to walk away.
Is it okay if the seller’s addendum removes or changes the insurable title language?
All marketable title should be insurable (however, not all insurable title is marketable). Note, however, that both the REIN and VAR contracts have exceptions for easements, etc. and so title could be contractually marketable, but not insurable because a title company might not insure where such contractually excluded matters like certain restrictive covenants, easements, etc. are present. If financing is a contingency the buyer might have an out if a lender’s title insurance policy cannot be issued. To answer the question then: I seriously question why a seller needs to remove language at least promising “insurable title” – think about the significance of that. A middle ground is a counter/addendum expressly providing that if title is not “clear, marketable and insurable then either Buyer or Seller has a right to cancel the contract.” With this language the seller is not at risk of being in breach should there be a problem but the buyer is also protected.
Is it okay if the seller’s addendum removes the marketable title language and replaces it with insurable title language?
Not quite a mortal wound since insurable title offers some protection for a buyer. But as noted above they are not the same. I would try the counter and options described in the FAQ regarding removing it entirely.
What does the word “warranty” mean when it is used to describe a deed?
Same definition we give to it when we use in the context of other warranties, e.g. a car warranty. It is a promise, a guarantee.
What is a general warranty deed?
A general warranty deed seller warrants (promises or guarantees) that he holds clear title to the property and has a right to sell it. This warranty covers all problems created back in the chain of title (as opposed to the special warranty’s promise only that the immediate seller has not created a title problem). So, if a title problem arises the buyer would have the right, even years later, to sue the seller for breach of warranty, and in some circumstances force the seller to cooperate in getting the problem fixed. Note that deed title warranties do not cover condition of the property.
What is a special warranty deed?
A special warranty deed seller warrants (promises or guarantees) only that he has not created a title problem (as opposed to the general warranty’s promise that no one has). Obviously then general warranty is better than special warranty. One can later convey by general warranty even though title was taken with special warranty (or even with no warranty, see quitclaim deed below). So, if a title problem later arises the buyer would have the right, even years later, to sue the seller for breach of warranty but only if the seller created the problem. Fiduciaries (e.g. trustees) should always convey by special warranty and the contract should so reflect (and the VAR contract, unlike the REIN contract, has language to that effect). Note that deed title warranties do not cover condition of the property.
How does a special warranty deed differ from a general warranty deed?
Whereas a general warranty seller’s guarantee covers all problems created back in the chain of title, a special warranty seller only promises only he has not created a title problem.
Is it okay if the seller’s addendum changes the contract from general to special warranty deed?
I would prefer, as should you, that it be conveyed by general warranty, but yes I think that is an acceptable risk. General warranty is better of course as noted above, but if the buyer purchases an enhanced owners title insurance policy then the buyer should be okay. Remember the deed warranty gives you a right to sue for breach of that warranty, but since a lawsuit isn’t always the best remedy around (turnip sellers, sellers cannot be found, etc.) having a financially sound title insurance company to pay or defend a claim (or fix the problem) is a pretty good remedy.
What is owner’s title insurance?
Title insurance is insurance, just like any other insurance, except that here it insures against defects in ownership. A policy of title insurance is like a pre-paid legal agreement: the title insurer will provide legal defense against challenges to the buyer’s insured title (dependent, of course, upon the type of policy coverage) and will reimburse the buyer financially for losses due to covered defects in the buyer’s ownership rights. An owner’s policy insures buyers that the title to the real estate is free from all defects, liens and encumbrances except those that are listed as exceptions in the policy or are excluded from the policy’s coverage. It also covers losses and damages suffered if the title is unmarketable. The policy also provides coverage for loss if there is no right of access to the land. These are the basic coverages and an enhanced residential owner’s policy can be purchased that cover additional items of loss.
If I get owner’s title insurance am I protected?
About as protected as you can possibly get, particularly with an enhanced title insurance policy. I highly recommend it. If you ever have a loan officer or lender tell you that an owner’s policy is not needed (so you can save some money) you ought to ask them why then they require you to pay for a (lender’s) policy to protect them. If you ever have a real estate agent tell you an owner’s policy is not needed you ought to get that in writing so you can later sue them (does not need to be in writing, it’s just that the evidence of the bad advice is better).
Doesn’t the lender’s title insurance policy protect me?
No. It is called a lender’s policy because the lender is the insured, not the buyer, which means the buyer has no rights whatsoever under that policy. Many people think that if a lender’s policy pays the note will be paid and so the loss will not be that great and so they are somewhat protected. This is misguided and wrong for several reasons. First, an owner is not compensated for the equity in the property. Second, even if the lender’s policy “pays off” what in effect happens is that the title insurance company will buy the note from the lender. So even then the buyer is not helped because the title insurance company steps into the shoes of the lender – who has an unpaid note from the buyer – and they can insist a buyer pay regardless whether the collateral for the loan has been lost or not. Besides, a lender’s policy only insures the deed of trust securing the note, not the fee simple title a buyer would be concerned about, and so there are many different coverage provisions.
This is a guest post by Brian D. Lytle, Esq., Lytle Law, P.C. Reprinted with permission of the author.
Lytle Law is a general practice law firm located in Newport News, Virginia. From two office locations on the Virginia Peninsula we serve clients and try cases across the Commonwealth including the Peninsula, Newport News, Hampton, Williamsburg, James City and York County areas. Lytle Law has the experience and ability to satisfy nearly all of a client’s legal needs, and where we believe we need help we will either associate appropriate counsel or provide a referral. www.LytleLaw.com
Brian Lytle is the president of Lytle Title & Escrow, LLC a Virginia licensed, insured, and bonded real estate settlement company doing business as Lytle Title. With offices in Newport News and Williamsburg, Virginia, primarily serving the Virginia Peninsula (Hampton, Newport News, York County,Poquoson, James City County and Williamsburg), but we also regularly serve surrounding areas, to include New Kent, West Point, Suffolk, Isle of Wight, Gloucester and the greater Tidewater and Hampton Roads areas of Virginia.
The law may have changed since this article was written and published so caution is advised.