Zoning does not affect marketability, court rules.

In Voorheesville Rod & Gun Club Inc. v. EW Tompkins Co., 82 N.Y.2d 564, 606 N.Y.5.2d 132 (1993), the New York Court of Appeals recently rendered a decision which defines "marketable title" in the most basic terms.

The Court held that lack of zoning approval for subdivision of property would not render title unmarketable, even though the seller's failure to obtain subdivision approval was a violation of the village's zoning regulations, since the vendor did not specifically warrant or represent that it would obtain subdivision approval. The buyer by implication agreed to purchase the property subject to zoning laws.

The Court agreed with the seller that the buyer was in breach of contract when it refused to go forward with the contract based on the seller's failure to secure subdivision approval. The Court also agreed with Seller's termination of the Sale Agreement because the time for performance passed, due to buyer's refusal to close.

In this case it was undisputed that the contract was silent as to the specific issue of subdivision approval. Thus, nothing imposed on the seller an affirmative obligation of obtaining subdivision approval. Rather, the contract provided that the property would be conveyed by warranty deed, "subject to all covenants, conditions, restrictions and easements of record; subject also to zoning and environmental protection laws; any existing tenancies;... any state of facts which an inspection and/or accurate survey may show, provided that this does not render the title to the premises unmarketable."

The Court's reasoning was that the test of the marketability of title is "whether there is objection thereto such as would interfere with a sale or with the market value of the property" and marketable title is "title free from reasonable doubt, but not from every doubt". The Court further reasoned:

"Marketability of title is concerned with impairment on titles to property, i.e., the right to unencumbered ownership and possession, not with legal public regulation of the use of the property."

The law does not impede the transfer in these circumstances unless there is something in the contract that makes the transfer depend on fulfillment of the zoning regulation, and the contract at issue did not do that. The lesson to be learned in this case is best stated by the Court's concluding remarks:

"The solution for avoiding such problems, however, is not for the courts to expand the conditions which render title unmarketable thereby altering the concept of marketability of title, but for the parties to real estate contracts to include specific provisions dealing with the duties to obtain subdivision approval."

To quote an age old adage when it comes to buying real estate -- caveat emptor. If zoning is a basis of the sale, then make sure your attorneys say so and in writing.

(Peter Goetz is a senior member of the New York and New Jersey based law firm of Goetz, Fitzpatrick & Flynn, which concentrates its practice in construction and real estate law and related fields.