Cloudy Skies – Title Defects and Clouds

At Greenacre Law, we prefer blue California skies—but in real estate, the weather doesn’t always cooperate. One common snag you may encounter when buying or selling property is discovering a “cloud” or “defect” on the title. The title company typically uncovers such clouds doing a title search to confirm legal ownership and the right to sell or transfer the property.

In more than a third of real estate transactions, title companies undertake “extraordinary work” to clear up title issues. Since you rarely have a reason to do a title search outside a pending transaction, clouds can persist on a property for years or even decades without the owner having any awareness of them, and such issues can cause a done deal to fall apart.

A “cloud” can be one of any number of irregularities with the title: one of the most common is a lien on the property, which can happen for numerous reasons. Often the problem is a lien to secure a debt that someone forgot to remove. For example, a lien might be imposed for falling behind on child support—let’s say the mother then catches up on the payments, but the father forgets to remove the lien. When the mother (or even the child, who has now inherited the property) goes to sell, the title company will find the lien, which will prevent the sale. She will have to get a “release of judgment” from the father in order to clear the cloud from the title.

Similarly, you might have a “mechanic’s lien” on the property. If you have renovations done on your property, it’s common for the contractor to file a lien before they start work. This gives the contractor a secured interest in the property so that if they don’t get paid, they can foreclose on the lien. Much like the previous example, the contractor may forget to file a “satisfaction” of the lien once they get their money. Usually, the lien expires after a certain time limit, but if they aren’t resolved, they can delay the closing and potentially unravel the transaction.

Another common cause of title defects is a competing claim of ownership, which can result in a “chain of title” dispute. A faulty deed can result in a such cloud: for example, if you are using an LLC to transfer property, Your LLC, and you mistakenly record “You’re LLC” on the deed, then “You’re LLC” owns the property, not Your LLC.

In rare cases, you might even find someone presenting a deed to the property that wasn’t recorded (a so-called “wild deed”). Because each transaction needs to be recorded with the registry office, a title search should settle whose claim to the property is valid. However, the legal title recognized by the government may not be in fact the real owner—for example, we recently represented a client who did not know that the title to her house had been fraudulently obtained and that the house she was living in did not belong to her as far as the chain of title was concerned. Once such fraud or error happens, it can be a very difficult process untangling what happened and rectifying the proper title.

REMOVING A CLOUD

There are many other circumstances that can create a cloud on a title. In most cases, the title company quietly handles minor defects, or you may need to get a release of judgment as described above. In the case of the misspelled LLC, you might use a quitclaim deed to correct the error.

In other cases, you may need to file an action to remove a cloud or a quiet title action. These terms are often used interchangeably, but they actually have distinct goals. An action to remove a cloud aims to negate a specific legal document (or “instrument”) that is creating the cloud on the title. A quiet title can perform a similar function, but the goal of the action is to settle competing claims on a title. (For more, see our previous post “What is a Quiet Title Action?”)

To determine the best remedy in your unique circumstance, it’s a good idea to consult with experienced California real estate attorneys like those at Greenacre Law—we are experts in all things real estate and can tackle even the most complex and unusual title issues!