If a smooth, uneventful real estate transaction is compared to a sunny day, then everything that obstructs the seamless transfer of title is referred to as a cloud. Any claims, unreleased liens, or documents that exist on a property’s title record are referred to as “clouds.” This article is a guide on what a “cloud” on a title means in real estate, with examples of how to remove it.
Clear titles are preferred by property buyers, whereas clouds make property title transfers more complex. Furthermore, clouds have the potential to invalidate the legal ownership of the property. A record with a clear title is one that is free of legal claims or ownership disputes from third parties.
What Does a Cloud on a Title Mean?
Any document, claim, unreleased lien, or encumbrance that could invalidate or impair a title to real property or cast doubt on the title is referred to as a “cloud on the title.” The majority of the time, clouds on the title are discovered during a title search. A quitclaim deed, which releases a person’s interest in a property without specifying the nature of the person’s rights, is used to clear up title clouds.
Any property with liens or that is in foreclosure is unappealing to buyers because it creates a cloud on the title.
Cloud on Title Explained
Lenders often require a title search and title insurance to protect themselves against any third-party claims or encumbrances on the title to the property used as collateral. The mortgage origination procedure necessitates title searches and title insurance.
Factors that Cause a Title Cloud
Unresolved property issues are the most common cause of a cloud on the title. For example, if a mortgagee initiates foreclosure proceedings after a borrower defaults on a payment, the delinquent borrower may not be able to sell the property to a third party while the foreclosure is ongoing.
Liens from lenders or contracts to which the property owner has consented may exist on the property. If a property owner has a free and clear title to the property, they may be able to use it as collateral for fresh financing to cover other costs or debts. In this situation, a lien may be placed on the property until the debt is repaid.
Because it is difficult to determine who the true owner is, a cloud on a title is also known as a faulty title.
If there was a problem with payment for construction or redevelopment work that was contracted, property owners may learn that a mechanic’s lien was imposed on the property. The mechanic’s lien will be in effect until all labor and material costs are paid. Because the lien is attached to the property rather than the owner, any buyer of the property would be responsible for resolving the associated issues. The finding of a cloud on the title would almost certainly deter potential buyers from purchasing the property.
Probate issues, such as those arising from an estate or inheritance, can also cast a cloud over the title. In older houses, documents such as death certificates may be lost over time. This could generate problems regarding who owns the property in the end. If a property owner died without leaving a will stating who would control their estate or become the owner of the property, heirs may contest the title to the property in court.
Examples of a Cloud on Title
The presence of clouds reduces the home’s value. In addition, if the new property owner decides to purchase, they will be responsible for the obligations. Clouds can dissuade potential purchasers in several circumstances.
The following are some examples of clouds seen on title records:
- Construction liens or mechanic’s liens
- Errors in filing or clerical work
- Unidentified heirs
- Fraud and forgeries are two types of fraud.
- Easements or encroachments
- Disputes over boundaries
- Wills that have been probated incorrectly
- False information about one’s marital status
- Trust deeds that haven’t been made public
How do I locate a Cloud on a Title?
During a property title search, clouds are discovered. This usually happens after you accept a real estate offer. Title companies will look for documents related to a property in a variety of places. Deeds, county land records, divorce cases, and bankruptcy records are all examples. This search will show all unresolved claims and encumbrances on the property title.
Title companies check that the seller has the legal right to transfer a property’s title. It is also a necessary step to determine the title company’s ability to ensure a transaction. Title insurance provides protection for the property owner and lender in the event that liens or encumbrances get discovered.
Properties with cloudy title records may deny title insurance. Additionally, mortgage lenders will halt the lending process until the title issues are resolved.
How to Avoid a Cloud on Title
There are a few things property owners can do to avoid future clouds on title.
First, buyers should consider purchasing separate owner’s title insurance. During the closing process, lenders need buyers to purchase title insurance for the property. But, these policies usually protect the lender’s financial investment. If a title claim is successful in court, the owner, without an owner’s title insurance policy, could lose their down payment and accrued equity.
Additionally, an owner’s policy will cover the fees associated with resolving past title issues that weren’t discovered through the title search. Real estate agents should encourage their buyers to buy a separate policy to prevent a cloud on their title.
Property owners can enjoy creating detailed project contracts with contractors. Outlining project timelines, payment schedules, and payment records give both parties a clear paper trail of the agreement. This can reduce the occurrence of missed payments and mechanic’s liens.
Finally, property owners can avoid surprises on their titles. Checking the title record at the county recorder’s office keeps owners up-to-date on their status. This allows them to catch and resolve title defects as issues arise.
How to Remove a Cloud on Title
The process of removing a cloud on the title varies. Some are easier to remove than others. For example, to resolve a mechanic’s lien, the homeowner must contact the contractor to pay their balance. Then, the contractor will remove the lien. Similar liens, such as mortgage and tax liens, can be resolved this way.
Real estate agents need to be proactive when working with homes that have a cloud on the title. For buyer’s agents, be sure to address the clouds on the title. Leverage this as a negotiation strategy.
For example, informing the seller, “I have a buyer who is interested in your home but they noticed there are clouds on the title. If they are removed, I have a buyer for you!” may motivate them to clear the home’s title in order to secure the sale.
For seller agents, be proactive and take a look at your client’s title report early on in the process. It is possible that the owner is not aware that their property has clouds. Therefore, checking with the title company is very helpful. If there are clouds on the title, agents can work with sellers to make a list of the fixable clouds. Together, they can come up with a strategy to resolve them.
What does a “Cloud” on a Property Title Mean?
In real estate law, if you hear that a property has a cloud on the title, this means that there is some irregularity on the property’s record that may interfere with one owner conveying it to another. The problem could be an unreleased lien, another party’s claim to the property, or any other encumbrance that could invalidate the existing titleholder’s right to ownership. Clouds ordinarily surface during title searches, and depending on the details, they can be highly problematic in a real estate transaction. Very few buyers are interested in accepting property with liens and competing claims attached.
Quiet Title Actions
An owner can live in a home for years and be unaware that clouds are on the title. This could be because of breaks in the chain of title or mistaken claims. They can also arise when real estate is purchased at tax auction sales or is inherited after an owner passes away. A homeowner who finds themselves in this situation may file a quiet title action to settle the issue. California law provides that this legal remedy is also available to anyone who holds an interest or a claimed interest in the property. When all the correct procedures are followed, a quiet title judgment is binding on all parties and all known or unknown persons, and the title will be clear.
Quiet title actions do not have a statute of limitations. However, the courts will look at the facts on a case-by-case basis. Generally, California courts have held that quiet title actions must be brought within five years of the first adverse claim of title or adverse possession, four years, when the claim is based on an instrument’s cancellation, and three years when the issue is predicated on fraud or mistake. Ordinarily, the statute of limitations does not run against an owner who has been in undisturbed possession of the property. The definition of “undisturbed possession” has been defined and shaped by the state’s appellate courts. For example, recently, California’s First District Court of Appeal held in Huang v. Wells Fargo Bank, N.A., that a lender’s notice of trustee’s sale in a nonjudicial foreclosure did not disturb possession and therefore start the statute of limitations.
Action to Remove a “Cloud” on Title
An action to quiet title is different from an action to remove a “cloud” on a title. This remedy is appropriate when the cloud was created by filing a legal instrument. What usually happens is a legal notice called a Lis Pendens gets filed with a real property’s public records. This document notifies others that the property is involved in a lawsuit. Anyone who looks at your property records can see the notice. In effect, Lis Pendens dissuade others from buying a property that might have a legal judgment attached to it in the future. If the legal issue has been resolved, you will want to remove the Lis Pendens from your title record. To remove the notice, you would file an action to cancel or “reform” the instrument.
Having a clear title is essential as it will permit you to convey your property and purchase title insurance. Even if you are not selling your home at the moment, if you think there may be any cloud on your title, it’s vital that you talk with an experienced California real estate attorney to evaluate your situation and consider your options.
Clouds on the title are any unresolved issues that appear on a property’s title record. There are many types of clouds and their presence can make it more difficult to sell the property. That’s because it can invalidate the owner’s right to the property. Title companies play an important role at this stage of the real estate process. They conduct title searches to ensure that the property in question has a clear title.
There are ways that property owners can avoid clouds on title. They can create clear worker contracts, check title records, and buy owner’s title insurance. Resolving clouds on title can be as simple as paying taxes or costly and time-consuming. Agents review the title record of a property with clients to help them make informed choices.
Cloud on Title FAQs
What does clouding a title mean?
Clouding a title simply means placing a claim or encumbrance on the title of a property. Easements and mortgages on the land can result in these claims or encumbrances.
What is the most common cloud on a title?
The following are some common clouds on a title:
- Mechanic or construction liens.
- Clerical or filing errors.
- Unknown heirs.
- Fraud and forgery.
- Encroachments or easements.
- Boundary disputes.
- Improperly probated wills.
- A false representation of marital status.
What does it mean to remove cloud from title?
A cloud can be removed by repaying a debt or pursuing legal action against the previous owner of the property.
What is the best way to find a cloud on a title?
A professional title search company or an attorney can do a title search to determine if there is a cloud on the title. A title search is an examination of public documents to determine whether or not there is a cloud on the title and to validate the property’s legal ownership.
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