Updated: Jan 12, 2022
Sellers have an implied duty to ensure that the property they are selling has “good” or “marketable” title. Marketable title has no relation market value. Old cases may refer to “merchantable title” as the equivalent of “marketable title”, however – property can have marketable title and still have little or no market value. Marketable title is title which a reasonable buyer that is well informed of the facts and their legal consequences, would be willing to accept.
In order for property to be “marketable” it must embrace both the legal and equitable estates, be free from unknown encumbrances, and be defensible and salable. Encumbrances includes liens, real covenants, and/or easements. What these three things have in common is that it gives a third party either a right to use or right to control the property. For example, if the property acts as security on a loan, that lien must be disclosed to the buyer in order for the property to be marketable. The key to marketable title is notice, whether the buyer is aware of other’s rights. This can be tricky when the law applies “implied notice.”
There are two types of notice: actual or implied. Actual notice occurs when the seller affirmatively notifies the buyer of a defect, either in writing or orally. Implied notice occurs when the buyer would-be on notice of the defect if they did their due diligence in researching the property. This includes when a lien, easement, or real covenant is recorded in the county, or if the defect is visually apparent on the property even if the buyer never goes to the property or looks through county records.
A common example of implied notice in regard to an easement is when a parcel has a telephone pole on it. In this instance there is an easement that exists between the parcel owner and the phone company that operates the telephone lines. It allows the phone company the right to access the private property in order to use and regulate the phone pole. Any visually apparent easement does not need to be verbally disclosed or even disclosed in writing to the potential purchaser because it can be seen on the property and the law assumes that the purchaser is on notice, regardless of whether the buyer actually sees it. Thus, an easement that can be seen on the property will not affect whether title is marketable.
Remember, the key to marketable title is whether the buyer is on notice of certain defects. In the event that the real property does not have marketable title, a buyer can rescind the contract to buy the property and exit the escrow without fault. [Civ Code § 3394].