What Is a Cloud on Title?
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Clouds on Title Explained
According to the Nolo’s Plain-English Law Dictionary, a cloud on title is any claim or dispute about the ownership of or encumbrance on a property. This encumbrance can take a variety of forms: tax liens, improperly recorded documents, deed errors, ownership disputes, boundary disputes, probate issues, and many others.
More importantly, a cloud on title means that another party could potentially claim ownership of the property. For this reason, title companies won’t issue title insurance until the title defect, or cloud on title is resolved.
What Causes a Cloud on Title?
There are many unresolved issues that can cause a cloud on title. For example:
Liens: Most property owners are aware of mortgage liens against their properties, but liens can take a number of different forms. If the owner used a contractor to do renovations or repairs on the property, there could be a contractor lien that needs to be removed. Tax liens and other debt liens are common with distressed properties. In some cases, there may be HOA liens, restrictions, and covenants that affect the title.
Foreclosure Errors: If the foreclosure process isn’t followed according to the law, it could cause a cloud on title. This can be an issue even if a buyer isn’t purchasing a recently foreclosed home; errors in a change of ownership through foreclosure many years in the past can affect the chain of title.
Deed Errors: Errors and omissions on the deed can cause a cloud on title. A misspelled name, inaccurate legal description, or lack of a notary seal are common deed errors that can affect the transfer of title.
Illegal Deed: If a prior deed was made by an illegal immigrant or a minor, it invalidates the chain of title. Similarly, depending on the state’s dowry laws and the original vesting of a deed, if a married person tries to convey a deed without his or her spouse, it can affect the enforceability of the deed, causing a cloud on title. A missing or destroyed deed could also cause a title defect.
Forgeries: If any forged documents are part of the property’s public records, legal ownership may be jeopardized.
Heirs, Wills, and Probate Issues: Estate and inheritance matters can complicate the clean transfer of title. For example, if a property owner dies intestate and no heirs are located, the state disposes of the property. Later, a legal heir may turn up with a legal claim to the property.
Survey and Boundary Issues: If a surveyor’s line of record title doesn’t match the legal line of record title, it could result in a cloud on the title.
How to Find Clouds On Title
Clouds on title are identified by obtaining an abstract of title (i.e. – getting copies of all the recorded documents on a property) and performing a title search (reviewing all the documents to verify accuracy and identify issues).
This process is typically performed by a title company or attorney, but it can technically be done by anyone who understands how to obtain a property’s title history documentation and analyze the documents to spot problems.
There are professional abstractors who can be hired to do this work and data services that can be used to look up the information as well.
One example of an abstractor is ProTitleUSA, which can do this work throughout most of the United States.
And another example of a data service that can be used to retrieve the same information in most areas of the U.S. is DataTree.
DataTree’s GeoCoverage Map indicates where this coverage is available.
How to Remove a Cloud on Title
The process for removing a cloud on title depends on the nature of the defect.
Deed of Reconveyance: If the lender hasn’t removed the lien or trust deed even though the mortgage is paid off, executing a deed of reconveyance will remove the cloud.
Quit Claim Deed: Quit Claim Deeds are most often used to transfer ownership between family members, such as when a couple gets divorced and one spouse needs to remove the other from the deed. Title companies also use quitclaim deeds when there is someone who could potentially claim ownership of a property. By executing a quitclaim deed, the potential claimant transfers all ownership interest.
Quiet Title Action: This is the process of last resort when a cloud on title can’t be removed through other means. A quiet title action is a type of civil lawsuit used to settle ownership of a property. If the claimant proves his case before the judge, he is awarded full possession and is protected against future claims.
Quiet title actions are typically used when there are problems settling an estate or when a mortgage lender won’t remove a claim via a deed of reconveyance. A quiet title action may also be necessary in the case of a quit claim deed where the previous owner signs over his interest in the property but can’t guarantee the title is clear.
Buying or Selling Property with a Cloud on Title
A cloud on title means that the ownership of a property is potentially in question. This presents a problem for the seller because if the sale goes through and there is an ownership dispute in the future, the buyer can hold the seller responsible for damages, particularly if the property is conveyed with a Warranty Deed.
In addition, properties with a cloud on the title are difficult to sell, since buyers who need lender financing will be unable to obtain a loan without a clear title.
If the cloud on title is discovered during the loan underwriting process, one of three things can occur:
- The seller can cure the defect through one of the actions listed above
- The buyer can terminate the sales contract
- The buyer can find alternative financing, including seller financing, that doesn’t require title insurance
If the parties follow through with the sale, the buyer should be aware that ownership issues may arise in the future that may take significant time and money to resolve.
How to Prevent a Cloud on Title
Property owners can be proactive about maintaining a clear title. If a contractor is hired to do any work on the property, make sure the contract includes a lien release or lien waiver. Follow up with the mortgage lender once the loan is paid off to make sure the lien and trust deed are removed.
Property owners can also purchase title insurance to protect themselves against future claims. The title insurance required by lenders protects the lender, not the property owner, so a separate policy is necessary for personal coverage.