Title Contingency
What is the Title Contingency?
The title contingency is a clause in the Purchase and Sale Agreement (PSA) that gives the buyer time to have a title search conducted by the title company. If the title search finds that the property has liens or encumbrances against it, the title contingency allows the buyer to cancel the deal and keep their earnest money.
Why does the Title Contingency matter?
The title contingency protects the buyer from the financial repercussions of canceling a purchase if they find out the property has title issues during the closing process.
Title issues can be any outstanding financial or legal claims on the property, and they follow the home—regardless of a change in ownership. A “clear title” refers to the title of a property without any issues (i.e., liens or encumbrances) on it, such as unpaid taxes, other individuals’ property claims, encroachments, deed restrictions, or property easements.
And so, if in the PSA, the title contingency protects the buyer’s interests—allowing the buyer to cancel the deal and keep their earnest money.
Additionally, in cases where the buyer can prove fraudulent misrepresentation (meaning, the seller knowingly concealed that the title isn’t clear,) the title contingency gives the buyer the right to sue the seller to recoup any provable losses associated with the escrow process.
What happens when the title isn’t clear?
A clear title isn’t legally required to purchase or sell a home. However, a home without a clear title can pose significant financial and legal obstacles to both the buyer and seller.
Financed buyers won’t be able to get title insurance or a loan from a lender to purchase the home. Moreover, buying a property without a clean title will also make selling the home in the future difficult and heightens the risk of foreclosure and other repercussions later on.
For sellers, not having a clear property title makes it “unmarketable,” meaning buyers are far less likely to purchase the home. Therefore, if a seller discovers the title isn’t clear, they should investigate and remediate the liens and encumbrances as soon as possible.
