Title Examination; Adjoining Landowners

P&D Enterprises, LLC v Richard Restifo, et al, 26 Conn L Rptr 219 (Conn Super 2000).

Facts: After entering into a sales agreement to purchase a particular lot of residential property and just prior to closing, the Restifo family conducted a title search that disclosed a Surface Water Agreement (SWA) encumbering the subject property. The agreement was recorded a year and a half prior to the time at issue, and was executed by the proposed seller of the property along with the owners of an adjoining parcel. The agreement contained three main provisions essentially requiring the owners of the subject property to do the following: (1) maintain all improvements to the property and its two ponds so as to ensure the free passage of surface water across the property; (2) reimburse the owners of the adjoining parcel for any damage caused by ponding or inundation, to maintain a landscape buffer of trees between the two adjoining properties; and (3) pay for costs and attorneys fees incurred by the adjoining property owners in any legal action to enforce the agreement. After discovering the SWA, the Restifos refused to go through with the closing, asserting that the SWA rendered the title unmarketable. Before the court was the seller's application for a prejudgment remedy.

Holding: The Standards of Title of the Connecticut Bar Association provide that a title defect will not render a title unmarketable unless it presents a real and substantial probability of litigation or loss, which will prevent it from being sold at a fair price to a reasonable purchaser or mortgaged to a party of reasonable prudence. The function of the trial court is not to try the title, but to determine whether it is free from reasonable doubt in law or in fact. An attorney assessing marketability of title must consider not only whether the title is good but whether it is likely to be acceptable to a subsequent attorney acting for a potential purchaser or mortgage lender. Evidence indicated that the title insurance company would have excepted the SWA from the title policy coverage, and that the bank to which the Restifos had applied for a mortgage had demanded protection from any judgment pursuant to the SWA, or complete removal of the SWA. Therefore the court found that the title was not free from reasonable doubt in law or in fact, and was unmarketable. Although the seller eventually eliminated the SWA, the court held that the Rastifos were not obligated to put their lives on hold during the course of this removal. The court also emphasized the impropriety of the seller's failure to disclose the existence of the SWA to the Rastifos until days before the closing. The seller's application for a prejudgment remedy was consequently denied.

EDITOR'S NOTE: Under Illinois law, merchantable title is not necessarily perfect title, but rather title reasonably secure against the risk of future litigation. Sinks v Karleskint, 130 Ill App 3d 527, 529, 474 NE2d 767, 769, 85 Ill Dec 807, 809 (5th D 1985). It is a title not subject to such reasonable doubt as would create a just apprehension of its validity or market value in the mind of a reasonable, prudent and intelligent person; one for which such persons, guided by competent legal advice, would be willing to pay fair value. Id, Firebaugh v Witenberg, 309 Ill 536, 541, 141 NE 379 (Ill 1923). The determination of merchantability also depends to a great extent on the construction of any contract provisions relating, either explicitly or implicitly, to that issue. Seligman v First Nat Investments, Inc, 184 Ill App 3d 1053, 540 NE2d 1057, 133 Ill Dec 191 (1st D 1989). A purchaser who enters into a contract with actual knowledge of certain encumbrances waives any objection to merchantability of title based on such encumbrances. Rock Island YWCA v Bestor, 48 Ill App 3d 761, 363 NE2d 413, 6 Ill Dec 731 (3d D 1977). Based on the above rules and pursuant decisions, an Illinois court would probably rule in favor of the Restigos, and find the title at issue unmarketable. In Nelson v Anderson, 286 Ill App 3d 706, 676 NE2d 735, 221 Ill Dec 932 (5th D 1997), an Illinois Appellate Court held that a defect in title, consisting of a convenant contained in a recorded plat providing that no construction could be undertaken within ten feet of any boundary line, rendered the title unmerchantable. The court found that a reasonable person could fear both the threat of future litigation and a decrease in the market value of the property, and therefore declined to discuss the degree of risk posed or the magnitude of the decrease in market value caused by the covenant as irrelevant. Because the SWA in Restigo would also lead a reasonable person to fear both the threat of future litigation by the owners of the adjoining property and a decrease in the market value of the subject property, an Illinois court would probably find the title unmarketable. Even if the title insurance company in Restigo had agreed to insure future purchasers of the subject property despite the encumbrance, the Nelson court held that such assurances do nothing to cure the actual encumbrance itself. Id at 933, 736.

© ATG atgc1100vol24

 

Print this page