We study TiOCl as an example of an S=1/2 layered Mott insulator. From our analysis of new susceptibility data, combined with LDA and LDA+U band structure calculations, we conclude that orbital ordering produces quasi-one-dimensional spin chains and that TiOCl is a new example of Heisenberg-chains which undergo a spin-Peierls transition. The energy scale is an order of magnitude larger than that of previously known examples. The effects of non-magnetic Sc impurities are explained using a model of broken finite chains.