What is a Marketability Act?
A regular nightmare for any practitioner representing sellers, buyers or borrowers in real estate transactions is receiving a title commitment for the subject property, only to find exceptions to the title that contain deed restrictions or development agreements from 50 years ago to which the buyer or lender will reasonably object. Often the options to remove such items from the title are limited to tracking down and requesting every party that benefits from such restrictions (or its successors) execute a termination, or requesting that the title company insure over or remove the exception. In order to address such restrictions and the marketability of title to real property, roughly half of the states have passed legislation that specifies that certain restrictions and encumbrances are no longer enforceable if such items have remained dormant for a number of years. These acts are often referred to as Marketability Acts.
Marketability Acts, also called Marketable Title Acts, or similar names (collectively referred to herein generally as “Acts”), are state statutes designed to remove certain dormant encumbrances on land after a set statutory period. Such Acts generally set a statutory time period, typically between 30 to 40 years, after which certain encumbrances are deemed extinguished and unenforceable. The overarching goal of the Acts is to remove older dormant restrictions that encumber the title to real property, thereby making the title more marketable.
“Marketable title” is understood to mean that the title to a parcel of land can be conveyed free from material encumbrances, claims, disputes about ownership or other restrictions that may limit a property owner’s use and enjoyment of the property. Typically, when purchasing real property, the buyer and its counsel conduct certain investigations into the title chain of the property through examination of a title commitment that shows encumbrances affecting the property. Such encumbrances are also called “exceptions” in the title commitment.
Exceptions shown on a title commitment can include items that align with the buyer’s intended use of the property, like standard utility easements or covenants that benefit the property; however, the title commitment may also show material items that limit the buyer’s intended use of the property, for example, a deed restriction requiring the property be used in a certain manner, an outdated mortgage or financing commitment, old zoning law violations or a development agreement that is decades old. The buyer will generally object to these material exceptions during its investigation of the property. If the seller is unable to remove these exceptions, the buyer typically will have the right to terminate the purchase contract and walk away from the transaction. If the exception or objectionable encumbrance is decades old, it is often difficult for the seller or buyer to track down the beneficiary of these agreements to terminate the exception. The Acts give sellers a good tool for easily removing certain encumbrances that may be otherwise difficult (or impossible) to remove from recorded titles.
Act Requirements and Exceptions
An encumbrance must meet several requirements to be extinguished by an Act. For example, such encumbrance must be older than the statutory period specified by the state, must be “dormant” and not re-recorded in applicable land records within that statutory timeframe and cannot fall under any other exceptions to the Act.
Most Acts include a robust list of exceptions to ensure recorded documents are not inadvertently removed from the title. In general, the most common exceptions to the Acts are the following:
- Leases: Many states’ Acts specify that interests of lessees, as well as lessors, are excepted from extinguishment for failure to record the required notice for the preservation of interests. Accordingly, leases that have not been re-recorded or memorialized within the statutory period would not be extinguished and the leasehold rights would remain enforceable.
- Easements and Similar Interests: Easements, licenses, rights of way and similar encumbrances grant a third party the right to use a portion of another’s property for a specific purpose. If an easement or similar interest is recorded properly in the public records, it is generally exempt from extinguishment under most Acts.
- Governmental Interests: Governmental rights and interests are another protected classification of property rights that are generally exempt from the Acts. These interests are broadly construed to preserve governmental rights on properties owned by a governmental entity, as well as to construe liens and other restrictions to benefit a governmental entity on property that may be owned by a third party. Governmental interests are largely considered to serve essential functions and purposes and promote the continuity of public infrastructure. Such rights can include the preservation of historical public rights-of-way (such as roads, highways or utilities), interests related to environmental protection or conservation easements and lands held by the U.S. government for federal interests (such as military bases). Because governmental interests are largely exempt from the Acts, such interests remain valid beyond the statutory period.
- Mineral Rights: In many states, oil, gas, mineral rights and other subsurface interests are exempt from being extinguished under the applicable Act. Subsurface interests generally exist separate from surface land rights, and such subsurface mineral rights and interests are often retained for decades or even centuries.
- Residential Protections: Almost all Acts contain an exception that allows restrictions limiting real estate to residential use to persist on the title, regardless of the time period it has existed. The covenant may restrict the property to multi-family use, single-family use or simply to general residential use. The purpose of this is to ensure that residential restrictions that protect homeowners are preserved and not inadvertently extinguished.
State-Specific Examples
Property owners, buyers and sellers should be aware of their state’s specific Act’s requirements. A few states with unique requirements are highlighted below:
- Indiana:
- Statutory period of a minimum of 50 years.
- Indiana has one of the longest statutory periods. This longer statutory period provides additional security for older property claims, which may be harder to uncover and re-record due to a lack of knowledge or resources. However, a longer statutory period can also perpetuate the effects of outdated encumbrances on property titles, allowing them to linger and possibly hinder transactions and clean titles in the present day.
- North Dakota:
- Statutory period of a minimum of 20 years.
- North Dakota has one of the shortest periods compared to other states. A shorter statutory period encourages the removal of outdated claims and interests, which results in a cleaner title and avoids the indefinite survival of claims on the title. The drawbacks of a shorter statutory period include a more significant administrative burden to frequently re-record title interests, as well as the increased risk of losing dormant, but valid rights.
- Florida:
- Statutory period of a minimum of 30 years.
- Florida’s Act has specific provisions impacting homeowner associations (“HOAs”) and includes re-recording requirements to maintain enforceability. Florida courts have held that HOA documents can be extinguished by the Act, and if an HOA has failed to re-record its covenants within the 30-year statutory requirement, such covenants can be removed from title.
- North Carolina:
- Statutory period of a minimum of 30 years.
- North Carolina’s Act contains a unique provision that explicitly calls for liberal construction of the statute and encourages courts to favor clearing titles and promoting marketability.
Practical Takeaways
- Confirm if your state has an Act. If an Act is applicable, property owners should understand the steps necessary to preserve land rights to avoid extinguishment. Property owners who desire to preserve recorded interests should re-record historical encumbrances affecting the title within the state’s applicable statutory period.
- Work with a title company and real estate attorney to review the status of the title to real property that you own or are considering purchasing or selling. Such parties can assist in preserving recorded interests or remove encumbrances that limit the marketability of the title.
- Create a system to monitor recorded interests affecting owned or leased real property and take appropriate steps to preserve or remove such interests to prevent legal issues surrounding the property’s title and its marketability.
- If you already own or are considering buying land that is governed by a property owner’s association, or commercial or residential restrictions, ensure that the association is aware of and in compliance with such Acts.
If you have any questions, please contact:
- Amy DeColibus at (720) 844-6202 or adecolibus@hallrender.com;
- Libby Park at (720) 282-2028 or lpark@hallrender.com;
- Song Faulkner at (303) 880-0680 or sfaulkner@hallrender.com; or
- Your primary Hall Render contact.
Hall Render blog posts and articles are intended for informational purposes only. For ethical reasons, Hall Render attorneys cannot—outside of an attorney-client relationship—answer specific questions that would be legal advice.
