Legal Definitions - nonmerchantable title

A nonmerchantable title refers to a property title that contains defects or clouds, making it difficult or impossible to sell or transfer the property to another party without significant risk or potential legal issues for the buyer. Essentially, it's a title that a reasonable, informed buyer would not accept because of concerns about their future ownership rights or the property's value. Such defects must typically be resolved before the property can be sold.

Here are some examples illustrating a nonmerchantable title:

• Example 1: Undisclosed Easement

  Imagine a homeowner, Sarah, tries to sell her house. During the title search conducted by a potential buyer, it's discovered that a utility company has an unrecorded but legally valid easement across the backyard for an underground pipeline. This easement grants the utility company the right to access Sarah's property for maintenance, potentially restricting the buyer's ability to build a shed or fence in that area. Because this easement was not properly disclosed or recorded in a way that would make it easily discoverable, and it impacts the buyer's use of the land, the title is considered nonmerchantable. A reasonable buyer would be unwilling to proceed until this issue is either resolved, compensated for, or clearly defined and accepted.

• Example 2: Outstanding Lien from a Previous Owner

  John inherited a commercial building from his grandfather and decides to sell it. A buyer makes an offer, and during the title examination, it's revealed that a contractor placed a mechanic's lien on the property ten years ago for unpaid renovation work commissioned by John's grandfather. This lien was never satisfied or removed from the public record. Even though John was unaware of it, this outstanding financial claim against the property makes the title nonmerchantable. A new owner would inherit the responsibility for this debt, so the buyer would refuse to close the sale until John clears the lien, ensuring they receive the property free and clear of such encumbrances.

• Example 3: Discrepancy in Property Boundaries

  A couple, Maria and David, are purchasing a rural plot of land to build a vacation home. The survey commissioned by their lender reveals a significant discrepancy between the property lines described in the seller's deed and the actual physical boundaries marked by existing fences and historical usage. A portion of what the seller believes is their land is actually being used by a neighboring farmer, and the legal description is ambiguous. This boundary dispute creates uncertainty about the exact size and shape of the property Maria and David would own, making the title nonmerchantable. They would likely halt the purchase until the seller resolves the boundary dispute, perhaps through a new survey, an agreement with the neighbor, or a quiet title action, to ensure they receive clear ownership of the intended acreage.