What it means
When you buy property you are really buying a bundle of legal rights, and the title is the proof that the seller owns them. A title can be flawed in many ways, such as an unpaid mortgage, a tax lien, a boundary dispute, a missing signature on an earlier sale or an old right of way that nobody mentioned.
A perfect title has none of these problems and can be traced back through an unbroken chain of valid transfers. Lenders care just as much as buyers.
A bank lending against a property wants to be sure that its mortgage will rank first and that nobody else can claim the asset, so it normally insists on a title check and title insurance before releasing funds. If the title proves faulty after the loan is made, the collateral behind the loan may be worth far less than expected.
In practice, lawyers or title companies carry out a title search, which examines public records for liens, judgments, easements and previous owners. They then give an opinion on the state of the title or issue insurance that pays out if a hidden defect later appears.
Any problems found can often be cured before closing, for example by paying off an old lien or obtaining a missing signature. A perfect title is an ideal rather than a guarantee.
Most properties carry some minor encumbrances, such as utility easements, that buyers accept, and a title can be described as good and marketable without being completely perfect. The question for the buyer is whether the remaining items would stop them using, selling or borrowing against the property.
The nuance is that legal systems differ. In some countries ownership is recorded in a government register that guarantees the entry, while in others the buyer relies on a chain of documents and insurance, so the practical steps and the level of protection depend on where the property sits.
In practice
Real-world examples.
Example
A family buys a house for $450,000. Their lawyer's title search shows an unpaid contractor's lien of $12,000 from a previous owner, and the seller must clear it at closing so that the family receives a clean title. The lawyer confirms the payment in writing and files the release with the public records.
Example
A logistics company buys a warehouse and takes out a $6,000,000 mortgage. The bank requires a title insurance policy for the full loan amount before it will release the money, because a defect could undermine its security. The premium is a one-off cost paid at closing and is small compared with the loan.
Example
A farmer inherits land and wants to sell it. A search reveals that a boundary fence was built on the neighbour's land decades ago, so the buyer's solicitor asks for a boundary agreement before the sale can proceed. The delay costs a few weeks, but it removes a dispute the buyer would otherwise inherit.
Case study
Seen in the real world.
Larkspur Developments is an illustrative, fictional company that agreed to buy a plot for a $9,000,000 apartment project. The purchase price was due in thirty days, and a construction loan was lined up to start immediately afterwards.
During the title search, the company's lawyer found an old easement that gave a neighbouring owner the right to cross a corner of the site. The lender said it would not advance funds until the easement was released or the building plans were redrawn to avoid it.
The seller negotiated a release with the neighbour for a payment of $40,000, and closing went ahead a week late. The illustrative lesson is that a defect found before closing is a negotiation, while the same defect found after closing is a lawsuit. Larkspur now orders a preliminary title report as soon as it signs a letter of intent on any site, so that surprises arrive early and cheaply.
Watch out
Common mistakes.
- Assuming that a seller who has the keys has a clear title, when ownership has to be checked in the public records.
- Skipping the title search or title insurance to save money, which can leave the buyer exposed to claims worth far more than the cost of cover.
- Treating all encumbrances as deal-breakers, when minor items such as utility easements are common and acceptable.
Questions
People also ask.
What is the difference between a perfect title and a clear title?
The terms are often used interchangeably, although a perfect title suggests an absolute absence of defects, while a clear title means no significant claims stand in the way of a sale. In day-to-day deals most professionals speak of marketable title.
Does title insurance protect the buyer from every problem?
No, it covers defects that existed at the time of purchase and are not excluded in the policy, and it usually excludes items found in the search that the buyer accepted.
Who pays to correct a title defect?
This is a matter for negotiation in the contract, but the seller is normally expected to deliver a marketable title and to pay to remove liens. If the seller cannot clear the problem, the buyer can usually walk away and recover the deposit.
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