Saturday, March 23, 2013

FAQ: What Are The "Title Standards" And Why Are They Important?

The Standards for Examination of Real Estate Titles in Arkansas, or "title standards" for short, have been published since 1995, with the most recent and fourth edition being published just this past week.  Attorneys frequently rely on title standards when conducting title examination for their clients.  Each state where I practice oil and gas law, including Arkansas, publishes a set of title examination standards. These title standards are not only used by title examiners for oil and gas interests, however.  Arkansas real estate lawyers, title insurers, and mortgage lenders frequently consult the title standards as a guide to determine whether a particular tract of land has marketable title.

As the chair of the title standards committee, I am glad to say that the latest edition of this comprehensive guide came to fruition from the hard work of several real estate and oil and gas lawyers from all over the state.  Once again, the committee, and the entire bar association has published a product that it can be very proud of.  The most recent publication of the title standards will be featured for sale at the 52nd Annual Natural Resources Law Institute in Hot Springs, Arkansas in just a few days time.  If you have not registered for the event, there is still time, and, unlike your hair place, walk-ins at the institute are certainly welcome.

To summarize, the Arkansas title standards are a guide used to assist the title examiner who is charged with determining whether a property owner has a marketable or unmarketable title.  According to Standard 1.1 of the title standards:


[M]arketable title is a title free from reasonable doubt both as to matters of law and fact, a title which a reasonable purchaser, well informed as to the facts and their legal bearings and willing and ready to perform the contract, would, in the exercise of that prudence which business persons ordinarily bring to bear upon such transactions, be willing to accept and ought to accept. Am. L. Prop§ 11.48 (A. James Casner et al. eds. 1952). A marketable title is "not only a title that [a purchaser] can hold against all adverse comers, but one that he can hold without reasonable apprehension of it being assailed, and one that he can readily transfer, if he desires, in the market." Tupy v. Kocourek, 66 Ark. 433, 51 S.W. 69 (1899). See also Baugh v. Johnson, 6 Ark. App. 308, 641 S.W.2d 730 (1982).

In other words, a marketable title is one that is essentially risk-free.  One simply should not be expected to purchase a tract of land that also includes the high probability of an expensive lawsuit. 


As a practical matter, "marketability" is the standard required by examiners, lenders, and title insurers before the close of a real estate transaction.  For example, if the tract under examination is encumbered by a prior mortgage, then before a lender will loan money to fund the purchase of that tract, the lender will require that the prior mortgage be satisfied and released.  The lender is simply saying that title is not marketable until the mortgage is eliminated.  By making the objecting to marketability, the title examiner for the insurer is protecting the lender's investment from an adverse claim by the prior mortgage holder.  Likewise, the lender will also require that other encumbrances, such as materialmen and mechanics liens, judgments, local, state or federal tax liens also be extinguished before closing.  The examiner will also make sure that the grantor of the property is the actual title owner.

For an oil and gas or other mineral interest to be deemed marketable, an examiner must also address a host of other issues.  Often times the mineral owner is not the same person as the surface owner.  Not only must the title examiner review the mineral owner's title to be sure that it is marketable, but the examiner must also make sure that the mineral title's source deed came from the true owner.  Mineral title examinations are more extensive than surface tract examinations and will require the examiner to research title back to the original United States patent.  The Arkansas title examination standards recognize this, and include several standards related to mineral interests. In addition, the title standards suggest various methods for curing a title examiner's objections. 

I would encourage practitioners and all others that are interested in Arkansas real estate or Arkansas oil and gas law to acquire a copy of the most recent title standards.  If you can not make it to Hot Springs for the institute next week, a copy can be purchased directly from the Arkansas Bar Association.  

C. Michael Daily is an attorney with the long-established law firm of Daily & Woods, P.L.L.C.  Mr. Daily can be contacted by telephone at 479-242-3953, by email at mdaily@dailywoods.com, or by regular post at 58 South 6th Street, Fort Smith, Arkansas 72902.  You can follow Mr. Daily via social network using any of the social network links in the right hand column of the page.  Disclaimer:  This blog is for informational purposesis certainly not to be considered legal advice and is absolutely not substitute for any of the benefits that are associated with the attorney-client relationship.