What is a “Title Defect”?

The purpose of this article is to explain about the legal concept of a title defect. Finding defects in the title of a property is important because it indicates there is a problem with the property’s ownership. Title defects can prevent sale and present additional costs to owners and buyers.

What is a title defect?

Title defects most commonly appear in the “chain of title” when title to property is passed from person to person. This means the title to the land (ownership) is unclear or flawed in the way it was sold or transferred to a current owner. Defects in title can hinder the sale of a home and also who the home can be sold to. This is because if a buyer learns of a defect in the title, he can object to the purchase of the property. (Easton v. Montgomery (1891) 90 Cal. 307, 308; Gates v. McLean (1886) 70 Cal. 42, 49.)

Defects can be found in the way property has changed hands. If a deed or other instrument was not recorded properly or was destroyed it can create defective title. (Bertola v. Allred (1920) 46 Cal. App. 593, 597; Allen v. Globe Grain & Milling Co. (1909) 156 Cal. 286, 289.) A deed should also be notarized as a form of verification. (Civ. Code § 1040.) Alternatively, a defect could also be as simple as a name being misspelled or names across different documents being different. For example, if someone uses a different middle name on a deed that can create a significant enough defect to affect the title.  

How are title defects found?

In conducting a sale of property, during escrow, a preliminary title report will reveal all encumbrances discovered. This is important as it also indicates what encumbrances stay with the property after closing. (Easton v. Montgomery (1891) 90 Cal. 307; San Jose Abstract & Title Ins. Co. v. Elliott (1952) 108 Cal. App. 2d 793.) These encumbrances may be debts tied to the land or other issues with the title which would affect the buyer. As a buyer is when you could object to defects that have been found in the title report (Swanson v. Thurber (1955) 132 Cal. App. 2d 171.) 

How can someone prevent title defects?

Title insurance can protect both the seller and buyer against unnecessary defects. This insurance can be bought when buying a home. It insures against property title defect and ownership defects. (Hocking v. Title Ins. & Trust Co. (1951) 37 Cal.2d 644, 651; Lick Mill Creek Apartments v. Chicago Title Ins. Co. (1991) 231 Cal.App.3d 1654.) This important because it may take years for title defects to be apparent. 

This is because a long lost relative of a previous owner may have part ownership of the home and wants money from the sale. If that relative or third person does have ownership interest in the house, they are a part owner. However, the inspection rendered by the title insurance company is not foolproof as it will not fully represent the condition of the title.  (Ins. Code §§ 12414.30(b), 12340.11; Lawrence v. Chicago Title Ins. Co. (1987) 192 Cal.App.3d 70, 76.) The preliminary report is not a representation of the condition of title and a title policy is a contract of indemnity, and not an abstract or a representation of title.

In a contract to buy property, a provision can be made to get your money back if the title is defective and unable to be fixed by you or the previous owner. (Gaume v. Sheets (1919) 181 Cal. 119.) This means a reasonable time is allowed to remove those defects and the buyer can agree to pay for the costs in clearing the title. (Kasey v. Molybdenum Corp. of America (1959) 176 Cal. App. 2d 346 ; Schmidt v. Callero (1950) 97 Cal. App. 2d 582, .) 

What type of issues does a title defect present?

For example, where there is an heir to the previous owner that you nor the seller knew of or you were granted the property through a quitclaim deed and did not receive full ownership of the property, a dispute may arise from these defects.

If a home is transferred with a quitclaim deed or sold without title insurance this may cause issues for the new owner. Normally an escrow transaction involves title insurance and a grant deed or warranty deed. These deeds guarantee that the person signing (selling) has not transferred the property and is the true owner. (OC Interior Services, LLC v. Nationstar Mortgage, LLC (2017) 7 Cal. App. 5th 1318, 1336.) Alternatively, a quitclaim deed makes no guarantees. (Southern Pac. Co. v. Dore (1917) 34 Cal.App. 521, 523.) If the original owner did not have full ownership of the property, the other person who had an interest may later dispute your title. If you do not have full title because of that quitclaim deed you may end up in litigation. This is why title insurance is important. Even if you received the property in a grant or warranty deed and title is disputed, your title to the land is going to be protected with title insurance. 

If there is a third party attempting to dispute your title to the land based on a defect, they may begin a lawsuit for quiet title. A lawsuit for quiet title allows the person or entity to establish title in the property. (Jensen v. Quality Loan Service Corp. (2010) 702 F.Supp.2d 1183, 1198.)

A lis pendens must be filed if a quiet title action or other lawsuit involving the property is taking place. A lis pendens is a public notice that there has been a lawsuit filed against the property.  (Deutsche Bank National Trust Co. v. McGurk (2012) 206 Cal.App.4th 201, 214.) If the suit is ongoing while the sale takes place, the buyer will be bound by the court’s judgment. (Arrow San & Gravel v. Superior Court (1985) 38 Cal.3d 884, 888.) If the seller did not disclose the lis pendens, then the new owner will need to find that out through a title search. A lis pendens is also important to you as a buyer because there is an ongoing legal dispute which may affect your title to the property.

What is an example of a title defect?

For example, “Shawn” is planning to sell his house that he owns, and “Julie” wants to buy it from him. Julie would want to buy title insurance to be protected against any title defects she or Shawn may not know about. In escrow, Julie would get a preliminary title report about any encumbrances or defects regarding the property. For example, if Shawn had work done on the house but had not paid the contractor for the work, the contractor could have placed a lien on the house. This is something Julie could tell Shawn he needs to pay off before she will buy the house. 

If Shawn had an estranged brother who tried to claim rights to the land after Julie bought it Julie could contest that there was no defect in her title. If she received the full interest in the property through a grant or warranty deed, covered by title insurance she would likely prevail against Shawn’s brother. However, if the deed was not properly recorded or was full of errors, Shawn’s brother could contest Julie’s claim to the property in a lawsuit. Ultimately, the prior issues with the land and title and how Julie received the property and title following the sale would determine if her title was defective or not. 

Conclusion

The Underwood Law Firm has a team of experienced lawyers who can help resolve your title issues as they relate to partition and help you pursue solutions to ensure clarity of title. We are here to help.