Understanding the title contingency in Washington state

A home’s title report is the record of all items that have been recorded against a particular piece of real estate. Things that appear on title are property taxes, mortgages, liens, judgement, easements, etc. Naturally, it is important to review this information prior to buying a house. Your title insurance company is going to do a lot of the work here and offer you a number of protections, but your purchase contract is going to have a number of contingencies in it that enable you to buy the property with a clear title.

title insuranceMost residential real estate transaction in the state of Washington are conducted on forms written by the Northwest MLS. I am going to write very specifically about those forms, and while the concepts may be similar in your state, I have no idea what standard title contingency practices are in your area if you are not in Washington.

There are two forms of title contingency in our local Washington real estate contracts. The first contingency is part of all purchase and sale contracts. Specifically, it says the following:

Unless otherwise specified in this Agreement, title to the Property shall be marketable at Closing. The following shall not cause the title to be unmarketable: rights, reservations, covenants, conditions and restrictions, presently of record and general to the area; easements and encroachments, not materially affecting the value of or unduly interfering with Buyer’s reasonable use of the Property; and reserved oil and/or mining rights. Monetary encumbrances or liens not assumed by Buyer, shall be paid or discharged by Seller on or before Closing.

If title cannot be  made so insurable prior to the Closing Date, then as Buyer’s sole and exclusive remedy, the Earnest Money shall,unless Buyer elects to waive such defects or encumbrances, be refunded to the Buyer, less any unpaid costs described in this Agreement, and this Agreement shall thereupon be terminated.

Lots of verbiage there, but here is the short summary. The seller must provide a marketable title, otherwise the buyer can walk away from the deal. What is “marketable title”? A title insurance company will not issue a title policy for a new buyer unless the seller can clear the title of all items that might interfere with the buyer’s ownership. Essentially, they have to pay outstanding taxes, payoff their mortgage, clear any judgments, etc. This covers a broad range of nasty title issues. If you are buying a property with a mortgage, your lender will not allow the deal to close without a title insurance policy. If the title insurance company cannot guarantee a “marketable title,” then the lender will not close the deal. If you are buying a property with all cash, you can opt not to obtain title insurance, but you’d be nuts to not do so. It is paid for by the seller, and offers you protection against stuff on title that can get in the way of your clear ownership of the property.

There is a second form of title contingency that is routinely included, aptly named the Title Contingency Addendum. This form is pretty simple. The seller has to provide a title report and the buyer has the opportunity to review it. A buyer can object to an item on the title report, and the seller is given an opportunity to clear it up. If it can’t be cleared up by closing, the buyer can walk away from the deal.

The Title Contingency Addendum is largely redundant with the standard title contingency in the purchase agreement, as both would cover title exceptions like unpaid taxes, unpaid mortgages, liens, etc. So why include this additional title contingency? The reason is that is cover some more obscure items that can be on title, but do not prevent the title from being “marketable.” They are not super frequent, but when they do come up, they can be something that a buyer wants the opportunity to review. Here is an example.

Buyer was purchasing a home on a large, private lot. The home was originally part of a larger lot next door. The lot was subdivided, and a new house built there. When the next door neighbor subdivided the property, they put a covenant in place on the new home. The covenant prevented the neighbor from further subdividing her property (she had a very big lot) during the first term of ownership. Once the new home was sold again, the covenant expired and the next door neighbor could subdivide her lot again and build another house. It was an unusual item on title, but obviously important to our buyers who didn’t want yet another home next to them. This issue did not affect the marketability of title, since it only had to do with a neighboring parcel. Our clients used their title contingency to walk away from the deal.

As a home buyer, you want the opportunity to review and object to items found on a title report. Many of the important items are protected by your title insurance company, but there are occasional instances where you do want the additional title contingency in place. As a general practice, including the additional title contingency is a good idea. Your real estate can help you through this decision based on the offer you are making.

  • This is a good subject to cover and but I’d want to point out a few things. First, you’re correct that the NWMLS purchase and sale agreement calls for the seller to provide
    marketable title. However, you go on to explain this concept but you confuse it with the concept of “insurable” title. They are very similar in nature but there are important legal distinctions. A title company may be willing to insure title to a property that a prudent, fully informed buyer would not want to buy due to marketability issues.

    This leads to the second misstatement, the NWMLS form 22T title review contingency is absolutely not redundant. It serves a related but distinct purpose, to provide the buyer an opportunity to affirmatively review the preliminary title commitment and approve or disapprove of the special exceptions that have been discovered by the title company. This last sentence reveals two shortcomings of the 22T title contingency. The first is that it limits the buyer’s review to only items specifically excepted from coverage by the title company. For instance, if there’s an encroaching fence that often will not be revealed by the title commitment but may be discoverable by a prudent inspection of the property. What right does the buyer have to object if he suspects there’s an encroachment?

    Second, the title company isn’t perfect and they sometimes miss stuff that, if they had discovered it, they would have excluded from coverage as a special exception. We
    routinely modify the 22T to broaden its scope to mitigate these short comings.

    Lastly, your post seems to be based on the premise that the title company is looking out for the buyer. In my opinion that is not the case. The title company is in the insurance business and, as such, they are looking out for themselves in order to maximize premiums and minimize paid claims. They specifically disclaim and will not provide legal advice to a buyer. Thus they won’t explain the potential significance of the special exceptions but frequently do little to dissuade buyers and their agents from the illusion that the buyer is being protected.

    Moreover, if there ever is a need to make a claim on the title policy get ready for them to react like most any other insurance company. If there’s the slightest reason to deny the claim, they will.

    • Thanks for the comments Marc.

      Looking at the title contingency in the NWMLS purchase and sale agreement, they actually use the word “marketable” and “insurable” interchangeably. The first paragraph defines what they mean by “marketable title.” The second paragraph says if not so “insurable”, you can terminate the agreement and get your EM back. Whether an insurable title is actually palatable to a particular buyer seems covered by Form 22T, the title contingency addendum.

      My point about redundancy and the protection that the title companies and lenders give you is about paying off basic liens. Every title report is going to have a special exception for unpaid taxes, unpaid mortgage, liens, HOA, etc. Do you need an additional title contingency to make sure those get taken care of? No, since title won’t insure and lender won’t lend until they are taken care of. On a lot of properties, those are the only title items to worry about. Of course you need the opportunity to review the report to determine that.

      The opportunity to object to exceptions on the title report is an important contingency to look for stuff that a title company doesn’t have a problem with but a buyer might. I agree that title could miss something, and agree that they are primarily going to look out for themselves, so buyers need to do their own diligence.