CLOUDS ON TITLE (OWNERSHIP) TO REAL PROPERTY

Real Property values will always fluctuate over time, but the one that is often overlooked is the marketability of the Property.  Every contract for the conveyance of Real Property contains an implied warranty that the Title will be delivered reasonably free from doubt of hazards to litigation either in fact or law. Although Title need not be perfect, it must not expose the reasonable buyer to the hazards of litigation. One sure way to inhibit your ability to sell your Property is to allow a cloud on the Title to be created or remain unchecked.

Marketable Title:

Commonly thought of as good or clear Title, is when Real Property does not have any adverse claims recorded against it. If Title is clear, it is generally marketable, in that it allows the owner to sell the Property free from any objects from the buyer as to whether they own the entire pie, or just a piece of it.

When purchasing a parcel of land, the Title Insurance company will issue an insurance policy wherein they will defend your rights to ownership subject to any past defect or encumbrances to with they are aware. This is effectuated through a title search wherein the county records are searched and any exceptions to the Title Insurance Policy are disclosed. These exceptions can range from easements for utility providers, county Property taxes, or outstanding loans or liens against the Property.

In a vast majority of the time, loans and tax assessments are paid through the escrow process and therefore do not exist at the time Title is transferred from the seller to the buyer. However, easements, liens, or other restrictions may remain which can affect the new owner’s use or Title to the Property.

Use Restrictions:

Nearly all cities and counties in California have some restrictions for the use of one’s land such as zoning or building ordinances. Although sometimes these uses can be modified or expanded upon, you should always conduct your due diligence to make sure you can do whatever it is you intend to do with the land once you have Title.

For instance, just because a church is currently constructed in a residential neighborhood, does not necessary mean that you can worship there. Under no circumstances should you ever assume a use is “grandfathered”  (a legal non-conforming use), or allowed to continue or expand, especially under current or past zoning ordinances.

Additionally, many properties have easements that have been granted decades ago for utilities, streets, or access to adjoining properties. Often, these uses cannot be changed or altered as they run with the land, not the ownership. However, you should be aware of what you can and cannot do around or with them. Although these types of encumbrances may affect the value of the land to some users, but not others, they will generally not affect the marketability of the Title.

Financial Obligations:

As stated above, liens such as Property taxes and loans, usually will be paid through the escrow process and removed from Title at the time of closing the Escrow (legally finalizing the purchase/transfer. Problems can however arise when there is a lien/loan recorded against the Property that the current owner already paid in full and does not want to pay again.

Situations often arise from a loan that had been paid, but a Reconveyance (a document indicating than the loan has been paid in full) is not recorded clearing the lien/loan, or where a contractor improved the Property, was paid, but failed to pay a subcontractor who recorded a mechanics lien against the Property. Unless removed from Title, the new owner would take Title to the Property subject to these lien holders, who could in turn, foreclose on the Property. Since this opens the potential new owner to litigation, it creates a cloud on Title thereby making it unmarketable.

When there is a defect in the chain of Title, then the defect must be cured or repaired before a seller can convey marketable Title.  If there is a current Title Insurance Policy, rather than curing or fixing the defect, which can be very expensive and time consuming, the Title Insurance company may elect to insure against any problem the defect may cause in the future.

Chain of Title:

Common but often over-looked clouds on Title arise from defective deeds, or improper land descriptions. An example of a defective deed could occur when a church purchases a Property in the name of “The Church of California, Inc.”, but the legal name in which they incorporated is actually “The Church of Southern California, Inc.”. Here, the first church may not actually exist as a corporation, or it may indeed be a legal entity, but it may not be your church. In either case, the first church owns the Property, not the second.

The case of an improper land description could result from a clerical error wherein the deed identifies a different parcel of land as opposed to the actual Property being conveyed.

Conclusion:

One of the biggest problems with insurable Title is that a buyer of a Property accepting insurable Title (rather than marketable Title) is taking a risk.  It’s not that the defects may ever threaten the value or ownership of the Property, but that upon resale of the Property, the next buyer may not be willing to accept the insurable Title and may demand a marketable Title.

Please see our other related articles


Holding Title to Property
The Escrow Process
Preventing Mechanic Liens
Why Use Bushore Real Estate

Disclaimer: Every situation is different and particular facts may vary thereby changing or altering a possible course of action or conclusion. The information contained herein is intended to be general in nature as laws vary between federal, state, counties, and municipalities and therefore may not apply to any given matter. This information is not intended to be legal advice or relied upon as a legal opinion, course of action, accounting, tax or other professional service. You should consult the proper legal or professional advisor knowledgeable in the area that pertains to your particular situation.

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