How to avoid clouding title protects the title to your real properties.
Disclaimer: This Blog Post does not constitute legal advice. It merely provides definitions of legal terms and general descriptions of legal matters. We recommend you seek advice from a licensed attorney before making any decisions regarding your real estate business.
How to Avoid Clouding Title Introduction
Your title to real estate is in jeopardy when a title search of the public records containing the history of title ownership, transfers of title, reveals interference with the full enjoyment of your ownership rights.
Like a cloud blocks the sun, a cloud on your title blocks your rights of ownership.
Clouding title leads to a reduction of value and marketability of your property. Prospective buyers discovering the cloud when conducting their title search refuse to complete the purchase.
However, certain documents filed with the Public Records keeping records of your real property affect your title, but may not affect marketability or your sale.
These include Covenants, Conditions, and Restrictions (CC&R) from a subdivision or a homeowner’s association. CC&Rs generally restrict the use of a property to require conformity with neighboring properties. For instance, a CC&R requiring a certain paint color of a condominium’s exterior. Or, a subdivision requires all homes to conform to a specific architectural style.
Understanding Clouding Title
The California Department of Real Estate (DRE) defines a “Cloud on the Title” as any outstanding encumbrance or claim, if valid, affects or impairs the property owner’s title. The cloud prevents the property owner from selling, conveying, or transferring marketable title to others. Examples include:
- Remaining Interest on a property’s title because one or more heirs failed to sign the title deed when sold.
- Mortgage Paid but no recording of the fact occurred.
- Pending Lis Pendens not removed even though the lawsuit settled and all parties agreed upon a dismissal of the court action.
- Removing a cloud on title requires patience and time. Therefore, the closing of a purchase may not occur until deletion of the cloud.
Examples of Clouding Title
The following examples of clouding title include:
- Mortgage Lien where the lender files a lien guaranteeing paying off the remaining balance of a mortgage before title transfers to a new owner.
- Deed Errors such as a misspelling of the property’s address in the title deed.
- Easement not recorded like the right for a utility company to run cable lines and power lines. Or, a landlocked neighbor with the right to use your road to access his or her home.
- Tax Liens for unpaid property taxes or by the IRS for unpaid income taxes.
- Mineral Rights held by the previous owner not transferred to you when you purchased the property.
- Lis Pendens an official notice of a pending legal action which may affect the real property.
The legal remedy to remove clouding title requires filing a civil lawsuit in a court of law to seek Quiet Title resolving the cloud on title.
Clear Title, shows that all your rights to enjoy your property remain intact.
Lis Pendens and Clouding Title Explained
Lis Pendens (“suit pending” in Latin) a legal notice filed with your real property’s public records. It notifies anyone looking at your property’s public records that a civil lawsuit filed against you and/or your property is pending. As a result, anyone purchasing your property may end up losing the property if the plaintiff wins the lawsuit and collects the judgment by seizing the property.
Basically, a Lis Pendens prevents the sale of real property. After all, who would want to purchase your property with a Lis Pendens and then lose it if the plaintiff wins the lawsuit?
Lis Pendens is a serious form of clouding title.
A Lis Pendens means the lawsuit could drag on for years. In the meantime, you can’t sell the property and may have difficulty refinancing too. Lenders do not want to lose the collateral for their loan to a pending lawsuit judgment. A title insurance company won’t insure the Lis Pendens.
How to Avoid Lis Pendens
Regarding a Lis Pendens, one legal strategy defense lawyer’s advocate is to make yourself unappealing for lawsuits. Like poisoning a water well to prevent anyone from drinking it. Asset protection specialists recommend purchasing all real properties using an LLC or an Anonymous Trust or Land Trust.
These legal structures keep you as an individual from becoming the legal title holder of the real properties. You get sued for a million dollars, but you don’t own any real estate for filing a Lis Pendens on real property. Defense lawyers call this a “Judgment Proof” defendant that plaintiff’s attorneys won’t waste time and money suing.
How to Understand Encumbrances and Liens
The California DRE publishes an Online Book explaining the state real estate laws.
The difference between encumbrances and liens revolves around money.
Liens demand money to pay for claims filed against the title of the real property or for acts in connection with the property. Failure to pay your property tax results in a Property Tax Lien. Not paying your federal income taxes causes an Income Tax Lien. A Lis Pendens notifies property owners (and prospective buyers) that a pending civil lawsuit may affect the property.
While liens are encumbrances, other encumbrances do not ask for money. For instance, an easement affects how the property is used by others. Thus, not all encumbrances are liens.
Another type of lien involves persons providing material and labor for the building or improvements of the real property.
If unpaid for their work and/or materials, they file a “Mechanic’s Lien” with the property’s public records. Unpaid contractors, craftsmen, and employees working on a building or renovation project file a lien demanding payment before the property transfers title.
Anyone furnishing supplies or labor such as plumbing, roofing, or lumber possess the right to file a mechanic’s lien on the property if not paid.
Owners hiring contractors often require a “Payment Bond” guaranteeing payment of all workers, suppliers, and subcontractors to avoid mechanic’s liens.
Design Professional’s Lien
Like a mechanic’s lien, design professionals also possess rights to file a lien on the property when not paid in full.
The law defines a “design professional” as certified architects, registered engineers, and licensed land surveyors furnishing services under a written contract with the property owner for designing, engineering, surveying, or planning works of improvements.
Property owners defaulting under the written contract must first receive a 10-day written demand for payment. Then, file the Design Professional’s Lien if unpaid after the 10 days.
Clearing Clouding Title
California uses the “Quiet Title” method to resolve conflicting interests in real property disputes. Quiet title removes a cloud on title by resolving all kinds of claimed interests in the title of real property.
Quiet title actions often settle disputes over title ownership, establish or defeat easements, foreclosures, and enforcement of liens.
However, removing a “cloud” on the title created by the filing of a legal instrument requires an action to cancel or “reform” the instrument. A written notice of Lis Pendens is an example of this type of action to “Clear Title”.
How to avoid title clouding involves understanding the different types of clouding title like:
- Liens (tax, mechanic’s, and design professionals)
- Lis Pendens and other claims
Avoiding clouding title includes:
- Purchasing real properties using legal entities (LLC or a Trust);
- Requiring contractors to provide a payment bond;
- Settling pending lawsuits; and
- Paying taxes on time.
Clearing clouding title requires filing a quiet title lawsuit.
Open Escrow provides careful title searches to find encumbrances, liens, Lis Pendens, and any other claims affecting your title.
Contact Us for all your escrow needs in California.
Steven Rich, MBA – Guest Blogger
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