A defective title refers to property or assets that cannot be transferred from the owner of record because there are liens or judgments against it. These liens and judgments can range from unpaid taxes to building code violations to missing or improperly filed paperwork, such as deeds or a certificate of occupancy. Typically in real estate or other transactions, a seller will make good faith attempts to resolve (or “cure”) title issues before a property can be transferred.
Ahead, find examples of title defects and how a defective title can become clear, marketable, and transferable, meaning it’s free of liens and third-party claims to ownership.
Definition and Examples of Defective Titles
Defective titles are marked by liens, judgments, or other claims of ownership, and therefore cannot be legally transferred until these issues are settled.
Technically speaking, “title” does not refer to a piece of paper (or digital equivalent), but to the concept of ownership that is recorded on a separate official document, like a real estate deed. In some cases, ownership and document are one and the same, such as for a car title.
Although title defects are frequently in the form of liens or judgments against property, they can also be things like missing signatures on filed paperwork, or inconsistent or conflicting land surveys, to note a few examples. There can also be state or federal tax liens on a property if the owner failed to pay taxes to the government by way of income, estate, or gift tax.
As an example, suppose someone who finances a car through an auto lender is unable to sell the car before settling the balance of the loan. Depending on the amount financed, there will be a lien on the car, meaning the auto lender has a legal ownership right to the car until the loan is paid in full.
Alternate names: Title defect, unmarketable title, bad title
How Defective Titles Work
Defective titles are typically discovered when a person attempts to sell a piece of property. Titles are said to be defective or “clouded” when there is an encumbrance, such as a mortgage or easement, or any other defect that restricts the ability of the current owner of record to sell it full and clear. The specific nature of the defect will depend on the unique circumstances of the property.
Although liens are some of the most straightforward and transparent title defects, there are also others, ranging from clerical errors to fraud. Common title defects include:
- Missing or incorrectly filed deeds
- Liens, such as unpaid property taxes or other fees
- Fraudulent documents
- Real estate survey disputes
- Unexplained gaps in ownership history
Other title defects or clouded titles can be mechanic’s or materialman’s liens, which refer to unpaid work done on a property by contractors, engineers, architects, or surveyors, all of whom are entitled to file a lien against the property for non-payment. This is one way a third party can claim ownership of a property and challenge its status as a marketable title.
Conducting a title search through the county where the property is based is usually the easiest way to determine who owns a title. If there is no clear owner, a person with a claim of ownership can file a lawsuit known as a “quiet title” action against any other party who makes a claim of ownership. When a quiet title action is filed, the courts will decide who is the actual titleholder and the title cannot be further challenged.
To protect owners and lenders from any unforeseen liens that can surface at the time of sale, many title companies offer title insurance. Title insurance protects the policyholder from losses incurred from title defects and only protects the policyholder from liens that were previously there prior to the purchase. Any liens incurred after the policy is in place are not covered under title insurance and are the responsibility of the owner.
Defective Title vs. Clear Title
A defective title has some sort of mark against it that prevents it from being legally transferred, whereas a clear title is free of any doubts or challenges to its ownership.
However, since property law is often determined at the state level, there may be differences between states in what constitutes a defect. For instance, ownership established by adverse possession, under which a person is considered to be the title owner of land owned by someone else as long as they have maintained continuous possession of it for a certain amount of time, is considered clear title in the majority of states.
A defective title can be cured, and become a clear title if the underlying issues are fixed. The cure will depend on the nature of the defect. For example, if there is a lien on the property for unpaid federal taxes, paying the back taxes will cure the defect. The formal process to convert a defective title to a clear title will be different in each scenario, so consider reaching out to a real estate or legal professional for help in complex cases.
- A defective title is unable to be legally transferred until liens or other debts are settled.
- Title insurance is frequently purchased as protection against certain title defects.
- Title defects include survey disputes, liens such as mortgages or unpaid taxes, and missing links in the history of title transfers.