Title
Title is an abstract term frequently used to link an individual or entity who owns property to the property itself. When a person has “title,” he is said to have all of the elements,including the documents, records, and acts, that prove ownership. Title establishes the quantity of rights in real estate being conveyed from seller to buyer. The previous section briefly examined some of the various types of ownership rights and possessory interests that can be involved in a parcel of real estate. We saw, for example, that one person may hold title in fee simple ownership, convey title to a life estate to someone else, and convey the right to reversion upon termination of the life estate to yet another person. Hence, there are many possible combinations of rights and interests.
An abstract of title is a historical summary of the publicly recorded documents that affect a title. The quality of the title conveyed from seller to buyer depends upon the effect these documents have upon the seller’s rightful possession of his or her property. Essentially, title exists only for freehold estates. A leasehold estate, on the other hand, is typically created by a contract (called a lease) between a person who holds title (the lessor) and another person (the lessee), whereby possession of the property is granted by the owner to the other person for a period of time. The existence of leases on a property will, however, affect the nature of the rights that can be conveyed to a new buyer because lease terms are binding on the new owner unless waived by the lessee or, in some jurisdictions, unless title is acquired at a foreclosure sale. Because investors and lenders are concerned about the nature and extent of the rights they are acquiring or financing, leases encumbering the property can have a profound impact on a property’s value.
Deed
Usually title is conveyed from one person (the grantor) to another (the grantee) by means of a written instrument called a deed. (We use the term grantor instead of seller because title may also be transferred by the owner [grantor] to an heir [grantee] by means of a will; hence the terms grantor and grantee.) To be a valid conveyance of ownership interests in real property, all deeds must be in writing and meet certain other legal requirements of the state in which the property is located.
Generally, a purchaser wants the deed to convey a good and marketable title to the property. A good title is one that is valid in fact; that is, the grantor does lawfully have the title he or she claims to have to the property. However, a good title, because of the lack of sufficient documentation or encumbrances on the property, may be unmarketable.
A marketable title is one that is not merely valid in fact but is also “free from reasonable doubt,” one that is “reasonably free from litigation,” and “one which readily can be sold or mortgaged to a reasonably prudent purchaser or mortgagee (mortgage lender).”
Encumbrances on a title, such as easements, leases, and mortgages (secured interests), do not automatically make it unmarketable. A purchaser may be willing to take title to the property subject to encumbrances. But the deed should note all encumbrances on the title so that a potential purchaser can rationally decide whether to purchase the property and to arrive at the appropriate price given any risks, costs, or restrictions posed by the encumbrances.
A deed is not the only way by which ownership rights in real property are conveyed. Titles are also transferred by wills, court decrees, and grants of land from the government to private persons. In addition, lawful title to property can be acquired by means of adverse possession. It should also be pointed out that although we use the terms buyers and sellers in this book, the more general terms grantor and grantee are frequently used in contracts or other documents in real estate. Grantors include sellers but also include property owners who may be transferring title by gift (not sale), by will, etc. Grantees include buyers in a transaction but also may include persons who receive title by gift, as an heir in a will, etc.
Methods of Title Assurance
There are three general ways in which a buyer has assurance that a title is good and marketable. First, the seller may provide a warranty as part of the deed. Second, there may be a search of relevant recorded documents to determine whether there is reason to question the quality of the title. This is usually done by an attorney and is accompanied by a legal opinion. Third, title insurance may be purchased to cover unexpected problems with the title.
General Warranty Deed
It is important to understand that any deed, no matter how complete the warranties contained therein, can only convey the quality of title that the grantor actually has to the property. This is why most buyers of real estate usually obtain independent assurance of the validity and marketability of the title from a third party. A general warranty deed is the most commonly used deed in real estate transactions and the most desirable type of deed from the buyer’s perspective. It offers the most comprehensive warranties about the
quality of the title. Essentially, the grantor warrants that the title he or she conveys to the property is free and clear of all encumbrances other than those specifically listed in the deed. As pointed out above, encumbrances listed in a deed could include easements and leases. Generally, the most significant covenants contained in such a deed are the following: (1) a covenant that the grantor has good (legally valid) title to the property, (2) a covenant that the grantor has the right to convey the property, (3) a covenant to compensate the grantee for loss of property or eviction suffered by the grantee as a result of someone else having a superior claim to the property, and (4) a covenant against encumbrances on the property other than those specifically stated in the deed. In a general warranty deed, these covenants cover all conveyances of the property from the time of the original source of title to the present.
Special Warranty Deed
A special warranty deed makes the same warranties as a general warranty deed except that it limits their application to defects and encumbrances that occurred only while the grantor held title to the property. Unlike the warranties in a general warranty deed, those in a special warranty deed do not apply to title problems caused or created by previous owners.
Bargain and Sale Deed
A bargain and sale deed conveys property without seller warranties. This is sometimes referred to as an “as is” deed. The buyer of property takes title with no assurances from the seller and must take the initiative to determine whether any imperfections exist and, if desired, how to cure such defects.
Sheriff’s Deed-Trustee’s Deed
A sheriff’s deed-trustee’s deed is a type of bargain and sale deed received by a buyer from a foreclosure or other forced sale because the sheriff or trustee is acting in a representative capacity. No warranties are added.
Quitclaim Deed
A quitclaim deed offers the grantee the least protection. Such a deed simply conveys to the grantee whatever rights, interests, and title that the grantor may have in the property. No warranties are made about the nature of these rights and interests or of the quality of the grantor’s title to the property. The quitclaim deed simply says that the grantor “quits” whatever “claim” he or she has in the property (which may well be none) in favor of the grantee.
Quitclaim deeds are appropriately and frequently used to clear up technical defects or “clouds” on the title to a property. Where the record indicates a person may have any potential claim to the property, obtaining a quitclaim deed from him will eliminate the risk that such a claim will be made in the future.
Very few buyers of real estate rely solely on the guarantees of title provided in deeds of conveyance by the seller. The two methods that buyers employ most often to obtain assurance of title independently of the guarantees provided by the seller are an attorney’s opinion of title and title insurance.
Abstract and Opinion Method
Obtaining a lawyer’s opinion of title used to be the most common method of title assurance before the widespread availability of title insurance. Essentially, the abstract and opinion method is a two-step process. First, there is a search of the title record, which involves locating and examining all of the instruments in the public records that have affected the title of the property in question. Second, when the title search is completed, a lawyer studies the relevant public records and other facts and proceedings affecting title for the purpose of arriving at an expert opinion of the character of the title. Based upon this study of the abstract or the record, the lawyer will give his or her judgment whether the title is good and marketable. If the title is found to be “clouded,” the opinion should state what defects or encumbrances were uncovered by an examination of the records, and it should also state what the lawyer thinks can and should be done to “cure” the defects uncovered. Because a lawyer’s responsibility is limited to what appears in the records, the lawyer cannot be held liable for any defect in the title not disclosed therein. Any liability borne by the lawyer is based upon proof of his or her negligence or lack of professional skill in the examination of the records. Rather than rely on the lawyer’s opinion, the title insurance industry has evolved. Many lenders and investors now prefer title insurance, which reduces this risk.
Most of the instruments that affect title to real estate are recorded, in accordance with the recording acts of the various states, at what is typically called the county recorder’s office. But some instruments that affect title may be recorded in other places. The nature of these other places where records are filed varies from state to state.
The Title Insurance Method
Title insurance was developed to cure the inadequacies of title validation accomplished through an abstract and legal opinion. Title insurance does all that a carefully drawn abstract and a well considered opinion by a competent lawyer are expected to do. In addition, it adds the principle of insurance to spread the risk of unseen hazards among many property owners.
Elimination of risk arising from unseen hazards in the public record has caused many investors and lenders to prefer this method of title assurance. In fact, title insurance is required for any mortgage that is traded in the secondary mortgage market. The title insurance process starts with a careful analysis of the records. The information available to the commercial title insurance company may be even more complete than that found in the public records. Skilled technicians at title insurance companies examine all available evidence of the title to determine its character. If their conclusions warrant, the title company will insure the title to a property and assume risks that are not even disclosed in the public records or in its own files. In short, title insurance ensures that the title is good and marketable. What title insurance is supposed to add to the abstract system and the opinion of skilled lawyers may be summarized as follows: (1) definite contract liability to the premium payer, (2) reserves sufficient to meet insured losses, (3) supervision by an agency of the state in which the title insurance company operates, and (4) protection to the policyholder against financial losses that may show up at any future time because of any kind of title defect, disclosed or hidden. Despite these advantages, the abstract and opinion method may still be used because of its lower cost. In general, one method, but not both, is used when purchasing property, to avoid the duplication of effort and cost.
Kinds of Title Insurance Policies
There are two kinds of title insurance policies. The owner’s policy insures the interests of a new property owner. The lender’s (or mortgagee) policy insures the interests of the mortgagee. The owner’s policy is payable to the owner (or to the heirs of the owner); the lender’s policy is payable to the mortgagee. Both policies are paid for with a one-time premium. In many states, premiums are regulated by a state insurance commission, as are financial requirements to incorporate and continue to do business. The one-time premium for the owner’s policy insures the owner for the entire period of time that she owns the property. The insurance premium may be paid by either the seller or the buyer, depending on the terms of the purchase contract, which are influenced by local custom and market conditions. It is almost universal practice for the borrower to pay the cost of the mortgagee’s policy which will insure the lender for the term of the loan. In cases where properties are refinanced by the same owner, a title search may be required by a new lender. In these cases it may be possible to obtain a new title insurance policy from the same company at a reduced cost.
Recording Acts
All states have enacted statutes known as recording acts. Although the recording acts are not uniform among the states, these acts in general provide a publicly accessible system for assessing and establishing claims or interests in real estate as against all other parties. These statutes also provide a set of authoritative rules for resolving priority disputes among competing claimants to interests in real estate. As part of this system, procedures have been established for placing documents affecting claims to real estate interests on the public record and for maintaining these records to make information available concerning almost all interests in real estate. Once an instrument creating a claim on an interest in real estate has been duly recorded, the recording is deemed to give constructive notice of this interest “to the world.” Constructive notice means that the recording acts deem a person to have whatever information is contained in the public records—information that could be obtained by a reasonably diligent investigation of the records whether or not the investigator actually has knowledge of the information recorded. Instruments affecting virtually all interests in real estate, including deeds, mortgages, assignments of mortgages, liens on real estate, land contracts, long-term leases, easements, restrictive covenants, and options to buy, are covered by recording acts. Most recording acts say that in order to establish and preserve a claim to an interest in real estate that will take precedence in law against future claimants, the instrument creating that claim must be recorded in accordance with state law. These acts were designed in part to protect an innocent person who purchased an interest in real estate in good faith unaware that the interest had already been acquired by another. For example, if A conveyed to B, who did not record the instrument establishing his claim, and later A conveyed the same interest to C, who did record, C’s claim would be superior to B’s if C was unaware of the prior conveyance and paid valuable consideration to A. B’s only claim would be to file a suit against A for fraud.
Mechanics’ Liens
One cloud on the title which may not be disclosed by the public records is a mechanics’ lien. In general, mechanics’ liens give unpaid contractors, workers, and material suppliers the right to attach a lien on the real estate to which they added their labor or materials. To obtain the payment owed them, they may foreclose such liens by forcing a judicial sale of the encumbered property. They are then paid from the proceeds of the sale. Use of mechanics’ liens exists in every state, although the nature of the statutes varies.
Mechanics’ liens are permitted to be recorded “after the fact.” In other words, state laws generally give contractors, laborers, or suppliers of materials a certain period of time following the completion of work or delivery of materials during which to file their lien. When the lien is filed it “relates back” and takes priority over all liens filed after the time when materials were first delivered or work was first performed on the real estate. As a result, until the end of the time allowed for filing (generally 60 days), a purchaser of an interest in newly constructed or improved real estate cannot be sure that the interest will be unencumbered or that the interest will have the priority bargained for. As a precaution, lenders and purchasers of such real estate should require the seller to provide an affidavit stating that at closing, all moneys due to contractors and subcontractors have been fully paid. In the event that liens are filed after the closing, a breach of the seller’s covenants in the affidavit can easily be proven, and the seller can be held liable for the discharge of those liens. In practice, owners of properties that are newly constructed or renovated should require contractors, workers, and material suppliers to sign a lien waiver. This is an acknowledgment that they have been compensated and that they agree to waive all lien rights. In many situations, if a lender is advancing funds for such work and material, a signed waiver will be required at each stage of construction before additional funds are released.
Limitations on Property Rights
Government Restrictions
Throughout this chapter, we have stressed the importance of property rights in real estate. We should also point out that although our form of government protects the rights of individuals to own real estate and to enjoy real property rights, these rights are not unrestricted. Government restrictions on private property rights do exist. Land use regulations are most prominent at the state and local level. The right to regulate emanates from the “police powers of the state,” which are based on the protection of the health, safety, and general welfare of its citizens (societal considerations). As the population in an area grows, it may apply to the state to become incorporated as a city, township, or municipality. At this point, the state usually delegates some areas of land use regulation. Incorporated areas then may modify and expand land use controls and develop restrictions on land use. These items are usually enumerated in zoning ordinances and building codes. Common restrictions used to implement controls include zoning ordinances, allowable uses, height restrictions, parking requirements, and building codes, permits, and inspections. The state usually retains control over water or riparian rights, mineral rights, eminent domain, and the like, while the federal government regulates housing and loan discrimination, interstate land sales and securities, and environmental restrictions (pollution of water and air, and endangered species, as well as effects of property use and development on wet lands).
Private Deed Restrictions
In some cases, property owners may choose to incorporate certain deed restrictions that limit the use of property by all subsequent owners of that property. Property owners may use such restrictions to achieve personal or business objectives. One example of a personal objective would be to add a deed restriction explicitly prohibiting the sale or consumption of alcoholic beverages on the property forever. In the event that this restriction is violated, the restriction may stipulate that title will revert to the owner who incorporated the restriction, or to his heirs. An example of a business objective that is commonly achieved through deed restrictions may involve subdivision of a large tract of land into smaller individual tracts to be sold to builders and developers. In order to assure the initial buyers of the subdivided tracts that subsequent buyers will build improvements that conform in quality and use, the owner of the initial larger tract may deed restrict each of the subdivided tracts. Such restrictions may require a minimum and/or maximum building size, minimum quality building materials, landscaping, and the like, thereby providing all owners with some assurance of conformity and general standards in design and building quality. However,resolution of any future violations of deed restrictions may prove to be problematic, particularly after a long period of time. In the first example, the original property owner or all of his heirs would have to bring an action against the current owner to regain title to the property if the deed restriction prohibiting the sale of alcohol were to be violated. In the case of the subdivision, usually a property owners association representing owners of the subdivided properties would have to bring legal action against the property owner who is in violation. In this instance, the court may require the owner in violation to cure the problem or pay the owners association for any loss in property value as opposed to forcing the sale of the property.
Interests, Encumbrances, and Easements
An interest in real estate can be thought of as a right or claim on real property, its revenues, or production. Interests are created by the owner and conveyed to another party, usually in exchange for other consideration. In real estate, an interest is usually thought to be less important than an estate. For example, an owner of real estate in fee simple may choose to pledge or encumber his property as a condition for obtaining a loan (mortgage loan). In this case, the lender receives only a secured interest, but not possession, use, and so on, of the property. The nature of the secured interest is usually documented in a mortgage which explains the actions that a lender may take in the event that the loan terms are not met by the property owner. In the interim, the property owner retains possession and use of the property. Another example of the creation of an interest in real property occurs when an owner encumbers a property by granting an easement, or the right to ingress or egress his property, to another party.
An easement is a non-possessory interest in land. It is the right to use land that is owned or leased by someone else for some special purpose (e.g., as a right of way to and from one’s property). An easement entails only a limited user privilege and not privileges associated with ownership. Examples of easements would be the following: property owner A allows property owner B to use a driveway on A’s land to provide owner B with better access to his property. In some retail developments, owners A and B may execute reciprocal easements to allow access across both properties, thereby enhancing customer traffic flow and shopping opportunities.
Source: Real estate finance and investments / William B. Brueggeman, Jeffrey D. Fisher.—14th ed. p. cm.—(The McGraw-Hill/Irwin series in finance, insurance, and real estate) ISBN-13: 978-0-07-37733-9