Uniform Laws Update

Uniform Laws Update Editor: Benjamin Orzeske, Chief Counsel, Uniform Law Commission, 111 N. Wabash Avenue, Suite 1010, Chicago, IL 60602.

Uniform Laws Update

Uniform Law Commission Announces Two New Real Property Studies

The Uniform Law Commission (ULC) recently announced the formation of two new study committees involving the law of real property. A study committee is tasked with determining whether a specific subject can be effectively addressed with a uniform state law. The committee will consider criteria including:

• the need for uniformity among the states;

• the current state of the law, including how states have addressed the subject with statutes or case law;

• whether recent litigation indicates unsettled matters of law; and

• the likelihood of widespread enactment.

The study committee will ultimately make a recommendation to the ULC whether to form a drafting committee to create a new uniform act.

Study Committee on the Uniform Marketable Title Act

A marketable title act is a state law that simplifies title searches by invalidating most property interests older than a statutorily-fixed period of time. The underlying theory is practicality. A comprehensive search of title records dating back hundreds of years can be expensive, time-consuming, and is usually unnecessary. As a leading treatise puts it, “most titles which are good ‘of record’ for the past several decades are good in fact, and nothing recorded in more remote times casts any doubt on them.” Whitman, Burkhart, Freyermuth & Rule,

provides information on uniform and model state laws in development as they apply to property, trust, and estate matters. The editors of Probate & Property welcome information and suggestions from readers.

The Law of Property § 11.12, at 794 (4th ed. 2019).

Currently, 19 states have some version of a marketable title act, with statutorily-fixed periods ranging from 20 to 50 years. In these jurisdictions, a title searcher can conduct a search of limited scope. For example, if the lookback period is 30 years, a buyer’s title search can begin with the last deed recorded more than 30 years before the date of the search. If no more recent claims are identified, the title is deemed to be marketable and any older claims will be ineffective against the buyer. Therefore, a claimant who wants to preserve the validity of an interest created more than 30 years prior must periodically record a notice that will appear in the truncated chain of title.

The ULC first promulgated a marketable title act in 1977, but it was packaged with a set of other real estate laws into a lengthy code that was not adopted in any state. A stand-alone version approved in 1990 was better received, but by that date a number of states had already adopted their own non-uniform marketable title acts. That led to the present situation, in which almost half the states have some form of marketable title act, but the exceptions and look-back periods vary widely.

Over the past 50 years, litigation in marketable title states has revealed certain issues related to the application and interpretation of the statutes. For instance, can a marketable title act extinguish a property interest that arose by implication or by operation of law rather than by recorded instrument? Does the act extinguish the right of a landlocked property’s owner to acquire an easement by necessity? Should the act operate to extinguish restrictive covenants in the context of a condominium or homeowners’ association?

These and other questions can conceivably be addressed in a revised Uniform Marketable Title Act, clarifying the law and standardizing recording practices across adopting jurisdictions. The study committee is consulting with stakeholders representing the title insurance industry, property records industry, recording offices, and real estate professionals to determine whether a more uniform law in this area would be beneficial.

Study Committee on the Use of Tokens in the Transfer and Financing of Real Estate

A typical real estate transfer commences when the buyer and seller sign a contract of purchase and sale, conditioned upon factors including the quality of the seller’s title, the type of financing, the physical condition of structures on the property, and other protections for the buyer and seller. Once the contract is signed, the parties undertake due-diligence tasks described in the contract, which may include inspections, title searches, surveys, environmental tests, and applications for mortgage loans. In the process, the buyer typically incurs significant expenses. All of these acts involve time, energy, multiple persons, and professional fees.

In recent years, proponents of blockchain technology have promoted its potential to revolutionize real estate transfers through the use of tokenization. They argue that real estate “tokens” recorded on a blockchain can embody a set of property rights and allow for the simpler transfer of real property without professional intermediaries and without the need to comply with traditional formalities.

Existing law in some United States jurisdictions permits a form of tokenization through the registration and certification of title under the Torrens system. Where authorized by statute, Torrens allows the government to issue a certificate of title, much like a motor vehicle title, that embodies certain rights held by the owner of record. The certificate is a public record of title, and any lien or other interest in the property must be listed on the certificate to be valid.

In theory, a certificated Torrens title could be “tokenized” into a nonfungible token (NFT) comprising units of data that represent a unique digital asset stored and verified on a blockchain. Proponents contend the token could then be transferred from seller to buyer using the blockchain’s protocols, in the process transferring all the same property rights that a buyer acquires under a typical transfer of real estate.

Within the past few years, cryptocurrency proponents have formed companies intended to demonstrate proof-of-concept. The prototypical tokenized transactions are not direct sales of real property, but rather sales of a limited liability company (LLC) that owns a tract of real property. The LLC’s governing documents specified that the LLC membership interest was embodied in a newly minted blockchain token. The title to the real property was in turn transferred to the LLC using a traditional recorded deed. However, once those initial transactions are complete the ownership interest in the real property, ostensibly now embedded in the token via the LLC, could then be transferred to subsequent buyers using the relevant blockchain protocol. Theoretically, the purchase of such a token could be financed via a cryptocurrency loan on a decentralized finance platform, rather than by a traditional mortgage lender.

Currently, the law of property does not permit all of the efficiencies that proponents suggest will flow naturally from tokenization. As long as real estate ownership is evidenced though public land records, the rights associated with an interest on the blockchain will remain dependent on the recorded title to the “tokenized” parcel of real estate. But we can expect proponents of blockchain transactions to seek legislation validating these transactions, and we can also anticipate potential disputes that will have to be resolved by the courts.

The new study committee will determine whether a new uniform state law can help to resolve these issues and advance the law of real estate transfers. Questions to be considered include:

• Should a tokenized right to possession of real property be transferred without memorialization in local land records?

• How can real estate transfer taxes be fairly assessed and collected?

• Should an owner’s right to possession of tokenized real property be extinguished without a foreclosure sale?

• How can liens, such as tax liens, mechanic’s liens, or homeowners’ association liens, attach to a tokenized real estate interest?

• Should the law implement a Torrens-like system for direct tokenization of real estate, rather than requiring the indirect method of using LLCs or similar holding entities?

The committee will consult with blockchain proponents, real estate practitioners, property records professionals, and any other interested stakeholders to determine whether it is possible to reach a consensus on the reforms that would be necessary to implement a true system of tokenization for real estate.

For more information about these and other ULC projects visit www. uniformlaws.org.

The primary sources for this edition of Uniform Laws Update were memoranda by Professor R. Wilson Freyermuth, Executive Director of the Joint Editorial Board for Uniform Real Property Acts, recommending appointment of the ULC Study Committees on the Uniform Marketable Title Act and on the Use of Tokens in the Transfer and Financing of Real Estate.

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Published in Probate & Property, Volume 36, No 6 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

Probate & Property, November/December 2022