After months of searching and negotiating, you’re finally ready to buy real property, whether it be a house, commercial building, or some land. All that’s left to do is sign some papers, pay the seller and the property is yours, right? Not necessarily. If you are not careful, you may wind up with a defective and unmarketable title. In real estate, a defective and unmarketable title means that there is a serious error, omission or other complication related to the ownership of the property (also known as a “title defect” or “cloud on title”) that makes it unsuitable for sale to a reasonable buyer. A title defect can delay or preclude your ability to purchase, sell, or convey your property. Banks will not issue loans to buyers for the purchase of real property with a defective and unmarketable title. When it comes to real estate in Maryland—generally speaking—if it’s not in writing, it’s not binding. Additionally, the law provides that any written document or plat filed and recorded in the county land records office is considered “record notice to the entire world”—whether you as a buyer know about it or not. Under the recording system, the state and county provide property owners, buyers, governmental agencies, utility companies, lenders and creditors with a means to protect their interests in real property by centrally filing and recording the documents and plats that affect their property in the county where it is located. This system also provides the public with the ability to search for any outstanding claims or interests in real property in which they may be interested. Typically as part of the settlement process under a contract of sale, a buyer will (and should) pay an attorney or title company to search the title to the property to ensure that the seller has a good and marketable title to convey without title defects. Usually, that is sufficient to protect buyer’s rights in the property. A thorough investigation substantially protects a buyer from making a costly mistake now. However, a good and marketable title does not mean a “perfect title.” Some encumbrances on title do not rise to the level of a title defect. For example, property is frequently affected by private covenants that restrict what you can do with your land and buildings, and can also subject the property to the authority of a home or property owners’ association. Easements, meanwhile, entitle other parties to use and access your property for a specific purpose. For instance, a utility company may have electric service running beneath your front lawn, granting the company an easement to dig up your yard to maintain or repair their equipment—and thus affecting your title. That type of easement is fairly standard, nonetheless, and typically affects several other properties in the same area. However, if the easement is for large, overhead power lines that cut through the middle of your house, that could well be a title defect. Even after a thorough search of the land records, title defects can still occur. For example, a title search will not disclose whether the seller’s current deed was forged. Title insurance will protect you against that event. Here are some common examples of title defects that can occur in the sale and purchase of real property.
1. Your Seller Does Not Actually Own the Property
Unpleasant as it is to imagine, the person you’re buying a home from may not, in fact, own the title to that property. Due to the possibility of their ignorance or even willful deception, so-called property owners should not be considered the final word on the buildings and land they occupy. A thorough examination of the wills and estates records should be a mandatory part of any title search. To demonstrate this point, imagine this: prior to its current occupant, the home belonged to man who died in 1950. The man left no will and no heirs besides his five children. Only four of those children signed the deed conveying the property to the current owner. The fifth child then died, leaving his own six children and a widow. This is a real problem for the current owner and potential buyer. Tracking down and discussing terms with heirs is usually expensive, time-consuming and not fun. However, it beats buying a building that legally belongs, at least partially, to someone else.
2. Unreleased Liens
A land record search will also disclose information about any existing liens or encumbrances affecting the property. A lien is a claim or right in the property typically given or acquired by a party who has lent money to the property owner. Failure to satisfy a lien could lead to your property being foreclosed or forfeited unless you pay off the lien. A title search should disclose any liens against the property that should be satisfied, paid, and released of record before you purchase at settlement. Examples of liens that a title search should disclose are…
- Judgment liens: When a creditor wins a lawsuit and obtains a judgment for monetary damages, a lien is placed against the debtor’s property. In Maryland, a judgment lien typically expires after a period of twelve years.
- Tax liens: If you owe the IRS or have not paid property taxes, state and federal authorities can place a lien on your building or home.
- Mortgages: Mortgages and deeds of trust create liens against real property as collateral for a loan from a lender. While an unreleased mortgage or deed of trust may not be binding on you personally, it is binding on the property you are purchasing and can be foreclosed. It is not uncommon for mortgages or deeds of trust to remain of record even if paid off because the lender did not file and record a release. Again, chasing down the lender or trustee can be a difficult and time-consuming task that should be taken care of before you purchase at settlement.
3. Missing or Mis-recorded Property Information
Missing or erroneous public records complicate matters further because a title search may not discover certain documents affecting the title to the property. Clerical mistakes do happen. Alternatively, property owners sometimes conceal or forge information. Again, title insurance can protect you against these types of title defects.
When purchasing real estate it is vital that you obtain from the seller a good title. Do not go it alone. Properly prepared contracts for purchasing real estate should be contingent on the seller providing you with a good and marketable title at settlement. Your attorney or title company can help you to make sure that is the case before you pay the purchase price. Proceeding without that critical step being performed on your behalf by an experienced professional is like buying a car with every extra feature added and forgetting to look for the brakes. A real estate legal professional can explain your title to you, examine the title for issues, and help you make an informed next step if title defects exist.
About David Severn
firstname.lastname@example.org | 240.772.5114 David A. Severn has been practicing law in Frederick MD, since 1980 and focuses his practice on land use, development and real estate. He represents clients in all aspects of the zoning and land use process appearing regularly before planning commissions, boards of appeal and legislative bodies of Frederick County, Washington County and their municipalities. He has served as lead counsel in numerous large and complex development projects including “Carroll Creek Park” a mixed use, public-private partnership re-development project in historic downtown Frederick modeled on River Walk in San Antonio, “Frederick Crossing”, the first large mixed use commercial retail/employment center in Frederick County and the redevelopment of the Frederick Towne Mall. David also works for the public sector in serving as legal counsel to the Town of Walkersville, the City of Brunswick, Frederick County and Washington County Public Schools for real estate and land use matters.