Understanding Real Estate Title Records and Legal Notice

Exam Tip: Remember that unrecorded documents, such as certain tax liens, may still be given priority by law despite not being in the public record. Always consider tax records and physical inspections as part of a thorough due diligence process.

The Chain of Title and Title Defects

To understand the history of a property, experts look at the chain of title, which is the chronological record of property ownership. However, the chain of title is not a complete picture of every obligation attached to the land; it typically does not include liens or other encumbrances.

When there is a gap in this chain of ownership or a dispute regarding who the rightful owner is, it creates what is known as a cloud on the title. A cloud makes the title "unmarketable" because it introduces uncertainty that could lead to future litigation.

To resolve these issues, a party may initiate a suit to quiet title. This is a legal proceeding intended to establish a party's title to real property against anyone and everyone, effectively "clearing" the cloud and providing a definitive judicial declaration of ownership.

Evaluating Title: Abstracts and Marketability

Before a transaction is finalized, the buyer must ensure they are receiving a marketable title. A marketable title is one that a reasonably well-informed and prudent purchaser would accept without fear of serious defects. It does not rely on doubtful questions of law or fact and does not expose the purchaser to litigation or threaten their "quiet enjoyment" of the property.

To determine if a title is marketable, professionals use several tools:

• Abstract of Title: Prepared by an attorney or an abstractor, this is a summary report of what a title search reveals. It includes all recorded liens and encumbrances and lists the records that were searched. However, an abstract has limitations: it cannot detect forgeries or interests that are unrecorded or only discoverable through a physical inspection of the property.
• The Torrens System: In some jurisdictions, the Torrens system is used. This system provides a certificate of title issued by the county clerk, which is so definitive that it requires no further search to validate ownership.

Protecting the Interest: Title Insurance

Because even the best title search might miss a hidden defect (like a forged signature or an unrecorded lien), the industry relies on title insurance to shift the risk from the buyer to an insurance company.

Title insurance is generally issued in two forms:

1. Owner’s Policy: Protects the purchaser from losses arising from defects in title and hidden defects.
2. Mortgagee’s Policy: Protects the lender (the mortgagee) to ensure their security interest in the property remains valid.

It is important to note that title insurance is not an all-encompassing shield. Policies include specific exclusions from coverage, which typically include readily apparent title defects, zoning issues, and other matters that should have been discovered through standard due diligence.