Author: LegalEase Solutions

Introduction

Seller entered into a contract to sell real property to buyer. The buyer placed $10,000 of earnest money in escrow. The intention of the buyer was to demolish the structure on the property and rebuild. The contract required seller to deliver good and merchantable title to the buyer at closing. The title commitment revealed the existence of a private easement on the property for a water main sewer running diagonally underneath the property and a few feet underneath the home. The seller, his architect, and the city, all agree that the easement will not interfere with buyer’s quiet enjoyment of the property or affect buyer’s plans to build on the property. The buyer terminated the contract and refused to go forward with the closing, arguing that the easement burdens the property and that seller cannot deliver the good and merchantable title promised in the contract.

Short Question

Does the existence of a water-main sewer easement render title unmerchantable?

Short Answer

No. The existence of an easement does not render title unmerchantable if it can be shown that the title is reasonably secure against litigation or flaws decreasing market value.  But if the contract between the parties contains a provision that is determinative of the issue, then the court may give preference to that provision.

Discussion

The existence of an easement does not necessarily render the title bad. The pivotal consideration is whether the title is merchantable. Rock Island Y.W.C.A., v. Bestor, 48 Ill. App. 3d 761 (1977).  In Rock Island, the landowners accepted an option offer to buy a certain piece of property.  The buyers requested cancellation of the option after discovering that the property was subject to a flood plain easement in favor of the government, under which it had the right to remove obstructions and overflow the property. The court said that the pivotal issue was whether the easement rendered plaintiff’s title unmerchantable. Id. at 765.  The court remanded the case for a determination of whether the existence of the floodplain easement rendered the title unmerchantable and if so, whether such a title defect could have been cured. If the buyers could prove that the title was unmerchantable and the inability to cure, then they were entitled to cancel the contract. Id.

Merchantable title is a title that is not subject to reasonable doubt that would create a just apprehension in the mind of a reasonable, prudent and intelligent person; rather it is one that persons of reasonable prudence and intelligence guided by competent legal advice would be willing to take. Sinks v. Karleskint, 130 Ill. App. 3d 527, 529 (Ill. App. Ct. 1985).   It is not perfect title, but a title that is reasonably secure against litigation or flaws decreasing market value. Id. Whether title to real estate is merchantable is a question of law for the court. Id.

All defects do not render title unmerchantable—only those that would cause a prudent purchaser to be apprehensive of future trouble. Wilfong v. W. A. Schickedanz Agency, Inc., 85 Ill. App. 3d 333 (Ill. App. Ct. 1980).  In Wilfong, the buyers backed out of the contract alleging that the sellers had failed to tender merchantable title to the property. The buyers contended that title was unmerchantable because the title insurance company excepted rights-of-way for drainage tiles, ditches, feeders and laterals, and because the seller failed to convey title to the roadway leading to the property. Id. at 337-38. The Court held that a contract for a merchantable title protects the buyer only from such defects as would cause a prudent purchaser to be apprehensive of future trouble. It does not provide him with a defense in the form of technical and unsubstantial objections, permitting him to renounce the contract and escape liability. Id. Because there was no showing of the existence of an actual right-of-way, despite the insurance exception, the mere possibility of a defect could not render title unmerchantable. Id. At 337. Furthermore, the failure to convey the roadway was not a material defect because the sales contract only guaranteed the right of ingress and egress over another’s property to access the roadway, which the insurer agreed to guarantee. Although there was no guarantee that access would always be to the existing roadway, this did not make the title unmerchantable, since mere technical objections are not sufficient if the buyer will get substantially what he contracted for. Id. At 338. The insurer had guaranteed the buyers ingress and egress and the possibility of having no accessibility in the future was a remote or improbable contingency that could not constitute a material defect. Id. Furthermore, although a purchaser has a right to require that the title will not expose him to a reasonable probability of litigation as to its validity, the title was free from the reasonable probability of litigation, and that is all that the law requires. Id.

As in Wilfong, in the instant case the alleged defect would not cause a prudent buyer to apprehend future difficulties. The seller, his architect, and the City all agree that the easement will not interfere with the quiet enjoyment of the property or with the buyer’s construction plans. Like the buyer in Wilfong, the buyer in the instant case will receive substantially what he contracted for, and there is no indication of any threat of litigation. Thus, the title is merchantable.

Another factor in the determination of merchantability is market value. For example, in SI Securities v. Edwardsville, 362 Ill. App. 3d 925 (Ill. App. Ct. 2005), Plaintiff took title to certain lots in a development by a tax deed, following the developer’s tax default. However, the lots were subject to covenants running with the land, that included numerous restrictions including easements, and Plaintiff defaulted on these covenants. Id. at 926. Although Plaintiff argued that Section 22-70 of the Illinois tax code extinguished all covenants by the tax deeds, the court interpreted the statute as not extinguishing easements or covenants running with the land. Id. at 929-30. The court rejected the argument that its holding violated the public policy that tax deeds convey merchantable title. The court reasoned that merchantable title is “good and marketable title in fee simple, free from litigation, palpable defects, and grave doubts; a title which will enable the owner not only to hold it in peace but to sell it to a person of reasonable prudence.” Id. at 930. Covenants are designed to enhance the value and marketability of property, not to impair transferability. The covenants at issue protect the value of the property by ensuring that constructions in the subdivision complement each other and maintain certain aesthetic standards. Id. Because a reasonably prudent purchaser would anticipate and appreciate the covenants, and the value of the property is protected, nothing about the covenants rendered title less merchantable. Id.

Merchantable title is not perfect title, but rather title reasonably secure against litigation or flaws decreasing market value. Stevens v. Wilson, 86 Ill. App. 3d 1047, 1053 (Ill. App. Ct. 1980). In Stevens, the buyer refused to continue to perform on an installment contract, alleging that the existence of public utility easements rendered title umerchantable. The buyer relied on Rock Island Y.W.C.A., v. Bestor, 48 Ill. App. 3d 761 (1977), where the court remanded for inquiry into whether a floodplain easement, allowing the government to remove obstructions and overflow the land, rendered seller’s title unmerchantable, and on Morgan v. Smith, 11 Ill. 193 (Ill. 1849), which held that an easement to dam up and use the water of a branch running through the land, and to use the water of a spring on the land, was an encumbrance making title unmerchantable. The court distinguished the two cases, as public utility easements for power lines and pipelines are nothing like the easements in Rock island and Morgan. Id.  The obtrusive easements in those cases were of such nature that they would have interfered with the buyer’s quite and peaceful enjoyment of the property and also decreased its market value.  The court reasoned that merchantable title is not perfect title but a title which reasonably secures against litigation or flaws decreasing market value. Id. Applying the general rule concerning merchantability, the utility easements for power lines and pipelines do not expose the title holder to an unreasonable risk of litigation nor do they tend to decrease the market value. Id. 1054.

The water-main sewer easement in the instant case is more analogous to the power line and pipeline easement that Stevens held did not hamper the merchantability of title, than to the flood and water easements of the cases distinguished in Stevens. Like pipelines, the sewer lines run underground and do not interfere with the property itself as the flood or water easements would. The sewer line easement neither exposes the buyer to liability nor decreases the market value of the property and therefore does not render title unmerchantable.

Where the contract between the parties is determinative of an issue, the court need not look at the merchantability of title. Kerton v. Lutheran Church Extension Fund, 262 Ill. App. 3d 74 (Ill. App. Ct. 1994).  In Kerton, the purchasers and sellers entered into a contract for the sale of a vacant lot. Id. The contract contained a provision allowing buyer to notify seller of any conditions in the title that were not acceptable to the buyer, within 15 days of receiving the commitment for title insurance. Id. at 75. The buyer objected to a right-of-way for a natural gas pipeline. Id. Although seller argued that buyer could only object to conditions affecting the merchantability of title, and that the pipeline did not hamper merchantability, the court construed the contract as allowing objections to “any” condition, regardless of whether it implicated merchantability of title. Thus, buyers could escape the contract if their objection was timely. Id. at 79. In the case at hand, if the contract contains a clause that provides the buyer with greater protection than the mere merchantability of title, then the contractual terms will govern.

Assuming the title in the instant case is merchantable, the seller will be able to keep the earnest money. Even in the absence of a forfeiture clause in the real estate contract, when the buyer defaults the seller is entitled to keep the earnest money in full, regardless of the actual damages resulting from the default. Wilfong v. W. A. Schickedanz Agency, Inc., 85 Ill. App. 3d 333, 340 (Ill. App. Ct. 1980).

Conclusion

The water-main sewer easement at issue does not appear to render the title unmerchantable because it does not create a risk of litigation or decrease the market value of the property, and would not cause a prudent purchaser to be apprehensive of future difficulties. However, if the contract between the parties contains a provision determinative of the issue, then the contractual term will govern.