PRINCIPLES OF OREGON

Table of Contents

1 Estates in Land (1995 ed) ...... Don K. Lloyd (1999 supp) ...... Jeffrey S. Davis 2 Concurrent Estates (1995 ed & 1999 supp) ...... Jean M. DeFond 3 (1995 ed & 1999 supp) ...... Mark A. Manulik (1995 ed) ...... Gary A. Maguire (1999 supp) ...... Gregory D. Fullem 4 Covenants, Conditions, and Restrictions (1995 ed & 1999 supp) ...... Eugene L. Grant 5 Statute of Frauds (1995 ed & 1999 supp) ...... Alan K. Brickley 6 Conveyances (1995 ed & 1999 supp) ...... Donald A. Gallagher, Jr. 7 Description of Land (1995 ed & 1999 supp) ...... Thomas R. Page 8 Recording and Priorities (1995 ed & 1999 supp) ...... C. Cleveland Abbe 9 Marketable Title (1995 ed & 1999 supp) ...... Michael G. Magnus 10 Highway Access (1995 ed) ...... Sandra Campbell (1999 supp) ...... Linda M. Bolduan Joseph W. West 11 Fixtures (1995 ed) ...... Janet M. Gravdal (1999 supp) ...... Milton C. Lankton 9 MICHAEL G. MAGNUS*

MARKETABLE TITLE

I. (§9.1) DEFINITION OF TITLE II. MARKETABLE TITLE GENERALLY A. (§9.2) Definition of Marketable Title B. (§9.3) Form of Title a Vendee Must Accept C. (§9.4) Title Must Appear of Record D. (§9.5) Public Records Must Evidence Good Title E. (§9.6) Judicial Determination of Title III. HOW THE QUESTION OF MARKETABLE TITLE ARISES A. (§9.7) As a Matter of Contract 1. (§9.8) Vendor and Vendee May Contract for Equivalent Standard 2. (§9.9) Defects in Title

MICHAEL G. MAGNUS, B.A., University of California, Irvine (1972); J.D., University of California, Los Angeles (1975); member of the State Bar of California since 1976 and the Oregon State Bar since 1977; partner, Greene & Markley, P.C., Portland. *The author gratefully acknowledges the assistance of Teresa H. Pearson and Tiffancy Lonnevik in preparing this chapter.

The case citations in this chapter were checked for overrulings and reversals through the following Shepard’s volumes: Oregon Citations ...... Vol87,No8 Federal Citations ...... Vol85,No15 The citations to ORS were checked through 1995.

9-1 3. (§9.10) Title Satisfactory to Vendee 4. (§9.11) Vendee Is Not Obligated to Pay if Title Is Not Marketable B. (§9.12) Defense to Vendor’s Action for Specific Performance C. (§9.13) Blocking Vendor’s Attempt to Declare Forfeiture D. (§9.14) As Defense to Vendor’s Suit for Strict Foreclosure E. (§9.15) Vendee’s Suit for Specific Performance; Abatement of Purchase Price F. (§9.16) Rescission by Vendee G. (§9.17) Vendee’s Action for Damages H. (§9.18) Action to Recover Earnest Money I. (§9.19) Title Insurance Recovery IV. KIND OF TITLE BARGAINED FOR A. (§9.20) Marketable Title Implied B. (§9.21) Title Insurance, Abstract of Title, and Their Relationship to Marketable Title V. SCOPE OF DOCTRINE OF MARKETABLE TITLE A. (§9.22) Generally 1. (§9.23) Encumbrances 2. (§9.24) Liens B. (§9.25) Mortgages and Trust C. (§9.26) Leases D. Zoning and Use Restrictions 1. (§9.27) Public Restrictions 2. (§9.28) Private Restrictions E. (§9.29) Taxes, Assessments, and Water Charges F. (§9.30) Judgment Liens G. (§9.31) Easements H. (§9.32) Failure to Probate I. (§9.33) Title by J. (§9.34) Title Defeated by Adverse Possession K. (§9.35) Liens or Encumbrances that Can Be Discharged or Removed

9-2 L. (§9.36) Title Derived Through Judicial, Statutory, or Tax Sale M. (§9.37) Foreclosure of a Land Sale Contract N. (§9.38) Boundary Line Disputes VI. (§9.39) FORM OF VII. (§9.40) WAIVER OF DEFECT IN TITLE VIII. (§9.41) WAIVER OF REMEDIES IX. (§9.42) BREACH OF TO DELIVER MARKETABLE TITLE

I. (§9.1) DEFINITION OF TITLE In order to understand marketable title, it is important to have an understanding of the term title and what it connotes: The term “title” has been defined as that which is the foundation of ownership, of either real or personal property, and that which constitutes a just cause of exclusive possession. It has also been defined as ownership, equitable or legal, and title may be of several kinds, among them absolute, conditional, equitable, and legal. “Title” has also been defined as the evidence of the right which a person has to possession of property, or to the enjoyment thereof, or the means whereby a person’s right to property is established. 73 CJS Property §31 (1983). See also United States v. Gossler, 60 F Supp 971, 973 (D Or 1945). Thus, in a sense, marketable title is perfect title, undisturbed by defects.

II. MARKETABLE TITLE GENERALLY A. (§9.2) Definition of Marketable Title Marketable title is title such as a prudent man, well advised as to the facts and their legal bearings, would be willing to accept. The doubts must be such as will affect the market value of the estate. They must not be frivolous and astute niceties. They must be such as would induce prudent men to hesitate in accepting a title affected by them. The doubt must be grave and reasonable.

9-3 §9.3 / Marketable Title

Security Savings & Trust Co. v. Evans, 144 Or 15, 23, 21 P2d 782 (1933). The question what constitutes marketable title is a question of law for the court. 1 MILTON R. FRIEDMAN,CONTRACTS AND CONVEYANCES OF REAL PROPERTY §4.1, at 351 (5th ed 1991). For example, a significant “doubt” is the lack of a patent from the United States in the chain of title for a part of the land offered to be conveyed by the seller. McCarty v. Helbling, 73 Or 356, 364, 144 P 499 (1914). A failure to foreclose prior contracts in the chain of title has also been held to create a serious doubt that rendered the vendor’s fee simple title unmarketable. Security Sav. & Trust Co. v. Latta, 118 Or 559, 563–564, 247 P 777 (1926). Pending litigation contesting the validity of the vendor’s title raises a serious doubt for a reasonable person and renders the vendor’s title unmarketable. Wollenberg v. Rose, 45 Or 615, 622, 78 P 751 (1904). In the Wollenberg case, two parties (the Marks) sold the property to Rose, and died soon thereafter. The heirs of the Marks were embroiled in litigation when tender of the deed and abstract was required by the vendee under the contract. Due to the litigation, the title of Herman Marks, an heir and purported owner of the property, was subject to dispute in court. In Cameron v. Benson, 57 Or App 169, 172, 643 P2d 1360 (1982), modified, 295 Or 98 (1983), in which the seller’s title was encumbered by judgment liens totalling more than $40,000, the court of appeals stated: “A purchaser is not required to accept title which might reasonably be expected to involve litigation.” The court also noted that the judgment lien creditors were not parties to the action and the trial court could not pass on the validity of the liens that would bind such creditors: “A court cannot create a marketable title ‘by passing upon an objection depending on a disputed question of fact, or a doubtful question of law, in the absence of the party in whom the outstanding right was vested.’” Cameron v. Benson, supra, 57 Or App at 173 (citing Wollenberg v. Rose, supra, 45 Or at 622).

B. (§9.3) Form of Title a Vendee Must Accept A variety of terms are used to describe marketable title. The courts use interchangeably the words good, merchantable, indubitable, and first class. See 92 CJS Vendor & Purchaser §§189–192 (1955). If the seller has agreed to convey good title, then the purchaser should not be compelled to take a defective or encumbered title. Collins v. Delashmutt, 6 Or 51, 53 (1876). However, the court has also noted:

9-4 Marketable Title / §9.5

The purchaser cannot demand a title absolutely free from all suspicion or possible defect, nor that he be guaranteed against any trouble on account of the title. He can simply require title such as a prudent man, well advised as to the facts and their legal bearings, would be willing to accept. The doubts must be such as will affect the market value of the estate. They must not be frivolous and astute niceties. They must be such as would induce prudent men to hesitate in accepting a title affected by them. The doubt must be grave and reasonable. Security Savings & Trust Co. v. Evans, 144 Or 15, 22–23, 21 P2d 782 (1933). The court continued: “[A] purchaser does not desire and is not compelled to purchase a lawsuit.” Evans, supra, 144 Or at 24.

C. (§9.4) Title Must Appear of Record Marketable title means that the title must appear of record and not rest in parol. Schreiber v. Karpow, 290 Or 817, 823, 626 P2d 891 (1981); Winslow v. Gilstrap, 147 Or 374, 380, 32 P2d 767 (1934) (citing Lockhart v. Ferrey, 59 Or 179, 183, 115 P 431 (1911)). In Oregon, “[t]he presumption is that all conveyances are duly recorded, and the fact that the record fails to show a conveyance of real property would give rise to the presumption that no such a conveyance is in existence.” Collins v. Delashmutt, 6 Or 51, 54 (1876). Furthermore, “[t]he principle is, that an abstract is an epitome of the substance of the record of titles, and a title cannot rest even partly in parol when tendered in performance of a contract calling for a clear title abstract.” Wurfel v. Bockler, 106 Or 579, 584, 210 P 213 (1923).

D. (§9.5) Public Records Must Evidence Good Title It is well established in Oregon that all conveyances must be recorded “so that the validity of titles may appear from the inspection of the records, and no purchaser can be required to go forward, and complete a purchase when the title of his vendor does not appear from an inspection of the records.” Collins v. Delashmutt, 6 Or 51, 53–54 (1876). The public records must clearly show that the title of the seller is valid. If the records do not show this, then the buyer has no obligation to purchase the land. Schreiber v. Karpow, 290 Or 817, 823, 626 P2d 891 (1981) (quoting from Lockhart v. Ferrey, 59 Or 179, 183, 115 P 431 (1911), the following: “A marketable title means one appearing to be such by the record of conveyances or other public memorial. It means that the title must appear of record and not rest in parol”); Winslow v. Gilstrap, 147 Or 374, 380, 32 P2d 767 (1934). In Wurfel v. Bockler, 106 Or 579, 210 P 213 (1923), the vendor sued for specific performance and the vendee counterclaimed for 9-5 §9.5 / Marketable Title rescission. The contract required the vendor to furnish an abstract showing marketable title, and allowed the vendor a short time period to cure any defects. The vendor obtained a decree to quiet title against all known and unknown liens of the deceased record owner. Then, the vendor obtained deeds from all known heirs and brought the abstract current. Unfortunately, the vendor’s title was not good because there was a one-year statutory period for the unknown heirs to intervene in the action, and the one-year period had not elapsed. The court determined that even though the one-year period had not elapsed, the vendor had the right to cure the record title, and that a one-year period was not unreasonable. The court also stated that the suit was premature under the circumstances. In Annand v. Austin, 86 Or 403, 167 P 1017, 168 P 725 (1917), the abstract did not show a clear title as required under the contract. The court held that because a good title was not shown in the abstract, the vendee was entitled to rescission even if further evidence was available to show marketable title. Again, the record as shown by the abstract was all-important. In Jaeger v. Harr, 62 Or 16, 123 P 61, 123 P 901 (1912), the contract called for an abstract of title. The abstract of title did not disclose a defect in the title to the lot, but the vendee claimed that the legal description of the plat in which the lot was located was defective. Because the vendor’s title was not brought into question, the vendor could use extrinsic evidence to show that the legal description was not defective. In so holding, the court approved cases that held extrinsic evidence was permitted to verify the abstract. In Lockhart v. Ferrey, supra, the contract required a deed to be delivered on the final installment, along with an abstract of title showing marketable title in the vendors. The vendors purchased the land from a party who had died during the sale. As a result, the vendors obtained a deed from the heirs. When the vendors tendered the abstract to the vendee, however, it showed title to the land in the deceased because the vendors had not recorded their deed. The vendee sued for specific performance and the vendors counterclaimed for rescission. The court held that the defect in title rendered the vendors’ performance incomplete and deprived them of the remedy of rescission. Consequently, the vendee could reject the tender and obtain a decree of specific performance. The vendor in Security Savings & Trust Co. v. Evans, 144 Or 15, 21 P2d 782 (1933), obtained its title from a woman who, pursuant to a will, had a life estate in the property, with the remainder held by the issue

9-6 Marketable Title / §9.7 of her body. The vendor had obtained deeds from the woman’s present issue—her sons. Nonetheless, in the future those sons could have children in whom the remainder would then vest. The question was thus whether the vendor’s title was marketable. The court noted that the question was difficult to resolve because a court in the future could hold that the issue had either a contingent remainder or an executory devise: Because there were minor children involved, the court could not render a decree. Thus, the title was not marketable and the vendee could not be compelled to purchase the property. A vendor may not sue for strict foreclosure unless the vendor has performed, or is able to perform, the vendor’s promises under the contract. In Winslow v. Gilstrap, supra, 147 Or at 379, the vendor sued for strict foreclosure but had been unable to deliver to the vendee, as required by the contract, an abstract showing the vendor’s marketable title. Until the abstract and deed were delivered by the vendor, the court found that the vendor was not entitled to a decree of strict foreclosure.

E. (§9.6) Judicial Determination of Title In certain instances, a court may adjudicate a question of law or fact in order to render the vendor’s title marketable. 1 MILTON R. FRIEDMAN, CONTRACTS AND CONVEYANCES OF REAL PROPERTY §4.6, at 386 (5th ed 1991). However, if a court cannot be sure that its judgment on the law, the facts, or both will be conclusive, and that another jurisdiction might rule differently, then the title cannot be rendered marketable by a decision of the court. CHAPMAN MAUPIN,MARKETABLE TITLE §283, at 772–773 (3d ed 1921).

III. HOW THE QUESTION OF MARKETABLE TITLE ARISES A. (§9.7) As a Matter of Contract The question of marketable title arises in the context of a contract for the sale of real property. When a vendor agrees to sell land to the vendee, the vendor is in effect agreeing to sell title to the land that is the subject of the contract. Furthermore, an agreement to transfer title by a good and sufficient deed binds the vendor to convey a good title. Standard Stevens-Ness Form No. 671 contains the following provision: “The Property is to be conveyed by good and sufficient deed free and clear of all liens....” As the Oregon Supreme Court has noted, “It is now a settled principle of law governing all executory contracts for the sale of real

9-7 §9.8 / Marketable Title property, that there is an implied warranty on the part of the vendor that he will convey a good title.” Collins v. Delashmutt, 6 Or 51, 52–53 (1876). Even if a title is good in fact, “it also must be apparently perfect when exhibited, that is, free from any reasonable objection.” Wurfel v. Bockler, 106 Or 579, 583, 210 P 213 (1923) (citing Peckham v. Stewart, 97 Cal 147, 153, 31 P 928 (1893)). In the Wurfel case, although the vendor had obtained a quiet title decree, section 59 of the Oregon and Resolutions allowed a defendant one year to contest a judgment entered, and the one-year period had not expired when final payment was due by the vendee under the contract. The vendor could not deliver marketable title because the abstract of title called for in the contract raised the one-year period as a defect. “A contract to sell real property imports, in the absence of any stipulation respecting the matter, an agreement to convey title to the premises in fee simple.” Burns v. Witter, 56 Or 368, 372, 108 P 129 (1910); see also 92 CJS Vendor & Purchaser §184 (1955); CHAPMAN MAUPIN,MARKETABLE TITLE §5, at 203 (3d ed 1921); 1 MILTON R. FRIEDMAN,CONTRACTS AND CONVEYANCES OF REAL PROPERTY §4.2, at 359 (5th ed 1991). Thus, once the contract is signed, the vendee need not accept less than good title to the property, and is not required to accept doubtful title that may expose the vendee to the expense and hazard of litigation. Percy v. Miller, 197 Or 230, 240, 251 P2d 463 (1953); 92 CJS, supra, §183.

1. (§9.8) Vendor and Vendee May Contract for Equivalent Standard In Heider v. Dietz, 234 Or 105, 110, 380 P2d 619 (1963), the court noted: “Since the parties to the original contract had called for title insurance, they had, in effect, elected to treat title insurance as their standard of marketability of title.” The standard Stevens-Ness earnest money agreement forms provide that the seller is to provide to the buyer a title insurance policy insuring marketable title in the buyer and that a title report is “conclusive evidence as to the status of seller’s record title.” As noted in §9.7, supra, such forms also require the seller to deliver a “good and sufficient deed.” In light of the case law, the two forms obviously do not make title insurance the sole standard of marketability. If the reference to “good and sufficient deed” was stricken, however, then title insurance may be considered the standard for marketability.

9-8 Marketable Title / §9.9

PRACTICE TIP: In using the standard Stevens-Ness forms, or any other forms, a lawyer should be alert to the provisions that impose certain duties on the vendor and grant certain rights to the vendee with respect to marketability. A lawyer who wishes to expand or restrict these provisions may wish to replace the standard language entirely. The language in Stevens-Ness Form No. 671, lines 29 and 30, is as follows: “The property is to be conveyed by good and sufficient deed free and clear of all liens and encumbrances except zoning ordinances, building and use restrictions, reservation in Federal patents, easements of record and ...” In addition to using an equivalent standard, the parties may establish that the vendee has no obligation to buy if the vendee does not receive an abstract, a title report, or a title policy showing good and clear title free from defects. Wurfel v. Bockler, 106 Or 579, 582–583, 210 P 213 (1923). Thus, if the vendor is unable to provide such an abstract, title policy, or title report, then even if the title is good in fact, the vendee has no obligation to consummate the sale.

2. (§9.9) Defects in Title It is quite common for a vendor to agree that the vendor will transfer the title free and clear of all liens and encumbrances excepting certain matters. If a matter is not expressly excluded, a vendee may be able to rescind the agreement. The omission of this defect may be unintentional. For example, in Percy v. Miller, 197 Or 230, 251 P2d 463 (1953), the vendor agreed to transfer title free and clear of all encumbrances except a mortgage. After a title search, the vendee found a reservation for a railroad right-of-way, a right-of-way for ditches and canals, an for public roads, a reservation of merchantable timber, assessments for drainage, and other matters. The court determined that these were substantial and not minor defects, and that the vendor had failed to comply with the contract. PRACTICE TIP: Again, in drafting an earnest money agreement, an agreement for sale and purchase, or a land sale contract, the attorney representing the vendor must exercise care to describe and detail the defects or encumbrances that are extant against the real property to be sold. Caution should be particularly exercised when using a preprinted form. A current preliminary title report is a useful tool in that regard.

9-9 §9.10 / Marketable Title

3. (§9.10) Title Satisfactory to Vendee A lawyer may draft a provision in a contract for the purchase of land that allows the vendee to examine the title report and object to any exceptions within a specified period of time. See DOCUMENTATION OF REAL ESTATE TRANSACTIONS Forms 1–2 (Oregon CLE 1992). This kind of provision is another method of permitting the vendee to determine in good faith if the title is acceptable to the vendee. NOTE: In older cases, the courts usually refer to an “abstract of title” rather than a title report to describe this condition of a contract. Kane v. Rippey, 24 Or 338, 340, 33 P 936 (1893). As a general rule, however, a vendee may not reject the title simply based on mere dissatisfaction. There must be a reasonable basis for rejection. Shannon v. Mathers, 271 Or 148, 152, 531 P2d 705 (1975); 92 CJS Vendor & Purchaser §185 (1955). Furthermore, the defect must be material and the sellers must be given a reasonable time to cure. Shannon v. Mathers, supra.

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