Market value and marketable title are not synonymous.  Dollinger DeAnza Associates v. Chicago Title (6th Dist. 2011) 199 Cal.App.4th 1132 (“Dollinger”), provides an excellent summary of several key cases interpreting what constitutes “unmarketable title” under the Policy’s insuring provisions.  Dollinger draws a clear distinction between matters which affect the market value of real property (e.g., land which was formerly used as a prison cemetery may have a lesser value) versus those matters which affect an owner’s record title interest in the land.

Facts:  Dollinger purchased property in Cupertino and obtained a 1992 ALTA Owner’s Policy from Chicago Title.  Dollinger understood that the property was divided into seven parcels, as reflected in the public records.  Dollinger thereafter entered into an agreement to sell Parcel 7, while retaining title to the remaining six parcels, but the sale collapsed once the parties learned that a Notice of Merger was recorded that purported to merge all seven parcels into one large parcel.  The Notice of Merger was not excepted from Policy coverage because neither Chicago Title nor Dollinger were aware that the “wild” merger notice existed:  the notice was not properly indexed under the property owner’s name in 1984 when the former owner sought to comply with the City’s conditions for development by proceeding to merge all seven parcels into one parcel.  Nevertheless, the Notice of Merger was recorded outside the prior owner’s chain of title.  

After Chicago Title denied Dollinger’s claim under the Policy, Dollinger filed its action for breach of contract (Policy) and breach of the implied covenant of good faith and fair dealing.  The trial court granted Chicago Title’s summary judgment motion and the Court of Appeal affirmed.  The appellate court determined that although a merger of several parcels into one parcel may impact the owner’s ability to convey title to that portion of property formerly contained within “Parcel 7,” the merger itself did not affect Dollinger’s title to the land.  Because coverage is expressly limited to matters affecting title to the land, Dollinger’s loss of sale did not affect its title although it clearly affected Dollinger’s bottom line.  The Dollinger opinion relies on several cases, all of which followed Hocking v. Title Ins. & Trust Co. (1951) 37 Cal.2d 644, 649.

In Hocking, the California Supreme Court provided a clear explanation of the difference between market value and marketable title.  The insured in Hocking purchased two unimproved lots in a subdivision, but could not be developed because they failed to meet applicable requirements for the issuance of building permits.  In hindsight, no one disputed that the plaintiff’s decision to purchase the lots was a very poor decision – since the lots were worthless – the Hocking opinion provided what has now become a classic a explanation for why plaintiff’s claim was not covered under the Policy:  “One can hold perfect title to land that is valueless; one can have marketable title to land while the land itself is unmarketable.  The truth of this proposition would appear elementary.”

Dollinger also cited with approval Elysian Investment Group v. Stewart Title Guaranty Co. (2d Dist. 2002) 105 Cal.App.4th 315, where after the plaintiff had purchased the property, plaintiff discovered the existence of a recorded notice that the premises were classified as “substandard.”  The Policy did not except the recorded notice from coverage.  Stewart Title’s motion for summary judgment was granted, and in affirming the lower court, the appellate court held that while a notice of substandard dwelling does not affect the owner’s title, it clearly affects the market value of the property.  “The fact that [the plaintiff] was required to bring the property up to code does not cast doubt on who owns the property.”  Id. at 317.

Dollinger also cited Lick Mill Apartments v. Chicago Title (1991) 231 Cal App 3d, 1654, 1660-1662, as an example of the difference conceptually between market value and marketability of title to the land.  In Lick Mill, the previous owner had been ordered to clean up hazardous substances on the property, but failed to do so.  The plaintiffs purchased the property and incurred significant expenses to effectuate the remediation and clean up.  The plaintiffs, as insureds of Chicago Title, thereafter demanded indemnification under the Policy:  “Because marketability of title and market value of the land are separate and distinct,” the Court of Appeal held that the Policy does not afford coverage for the physical condition of the property.  Again, was the property’s market value negatively impacted by the existence of hazardous substances?  Yes!  However, that did not mean that the plaintiff’s title was unmarketable.

Dollinger, however, made no attempt to distinguish 1119 Delaware v. Continental Land & Title (1993) 16 Cal.App.4th 992, 1003-1004, another decision from the Second District, decided nine years before Elysian.  In 1119 Delaware, the appellate court determined that a recorded conditional use permit issued as a condition of the former owner/developer’s right to build senior housing and to receive governmental financing for its construction created an “encumbrance on title” falling within the insuring provisions of the Policy.  The use permit required at least one occupant to be 62 or older or to have a physical disability.  Because of the foregoing requirement in the use permit, the appellate court concluded that the restriction created an encumbrance on title, impairing the insured owner’s ability “to convey unrestricted use of the property”.  In reaching its decision, the appellate court rejected the insurer’s argument that the use permit was expressly excluded under the broad exclusion for “laws, ordinances or governmental regulations restricting or regulating the occupancy, use or enjoyment of land” because the restriction in the permit was a restriction against the subject property only, rather than a government regulation of general application.

Cases that have upheld application of Exclusion 1(a) generally arise out of building, zoning, environmental laws and regulations that are not recorded within the public records, but regulate the use of similarly situated properties generally.  The use permit restriction in 1119 Delaware recorded against title and applying solely to the subject property, is clearly distinguishable.  That said, 1119 Delaware remains difficult to square with Hocking, Dollinger, Lick Mill, Elysian and other marketability of title cases, underscoring that matters affecting property value do not necessarily mean that title to the land is unmarketable.

For further discussion about the Dollinger decision, see Title News (July 2012) and its cover story entitled “Top Lawsuits Impacting the Title Industry” published by the American Land Title Association.