Title, Taking Title and Title Insurance
Although entirely different, these three are all connected. A basic breakdown of each one follows.
Title is best defined as a bundle of rights to real property in which a party may own either a legal interest or equitable interest. The rights in the bundle may be separated and held by different parties. Tyically a deed which is recorded by the County serves as evidence of ownership. Evidence of title is established through title reports written up by title insurance companies, which show the history of title (chain of title and property abstract) as determined by the recorded public record deeds. The title report will also show applicable encumbrances such as easements, liens or covenants. In exchange forinsurance premiums, the title insurance company conducts atitle search through public records and provides assurance of good title, reimbursing the insured if a dispute over the title arises.
California real property purchasers ask their real estate, escrow and title professionals every day how they should take title on a home they are purchasing. These professionals may identify the many methods of owning property, they may not recommend a specific form of ownership, as doing so would constitute practicing law. Real property purchasers should carefully consider their titling decision prior to closing, and should seek counsel to determine the most advantageous form of ownership for their particular situation.
The form of ownership taken (the vesting of title) will determine who may sign various documents involving the property and future rights of the parties to the transaction. These rights involve real property taxes, income taxes, inheritance and gift taxes, transferability of title and exposure to creditor’s claims. How title is vested can have significant probate implications in the event of death.
The following definitions of common vestings are intended as an informational overview only.
Sole ownership may be described as ownership by an individual or other entity capable of acquiring title. Examples of common vesting cases of sole ownership are:
1. A Single Man or Woman, an Unmarried Man or Woman or a Widow or Widower:
A man or woman who is not legally married or in a domestic partnership. For example: Bruce Buyer, a single man.
2. A Married Man or Woman as His or Her Sole and Separate Property:
A married man or woman who wishes to acquire title in his or her name alone.
*The title company insuring title will require the spouse of the married man or woman acquiring title to specifically disclaim or relinquish his or her right, title and interest to the property. This establishes that both spouses want title to the property to be granted to one spouse as that spouse’s sole and separate property. The same rules will apply for same sex married couples. For example: Bruce Buyer, a married man, as his sole and separate property.
3. A Domestic Partner as His or Her Sole and Separate Property:
A domestic partner who wishes to acquire title in his or her name alone.
*The title company insuring title will require the domestic partner of the person acquiring title to specifically disclaim or relinquish his or her right, title and interest to the property. This establishes that both domestic partners want title to the property to be granted to one partner as that person’s sole and separate property. For example: Bruce Buyer, a registered domestic partner, as his sole and separate property.
Title to property owned by two or more persons may be vested in the following forms
1. Community Property:
A form of vesting title to property owned together by married persons or by domestic partners. Community property is distinguished from separate property, which is property acquired before marriage or before a domestic partnership by separate gift or bequest, after legal separation, or which is agreed in writing to be owned by one spouse or domestic partner.
*In California, real property conveyed to a married person, or to a domestic partner is presumed to be community property, unless otherwise stated (i.e. property acquired as separate property by gift, bequest or agreement). Since all such property is owned equally, both parties must sign all agreements and documents transferring the property or using it as security for a loan. Each owner has the right to dispose of his/her one half of the community property by will. For example: Bruce Buyer and Barbara Buyer, husband and wife, as community property, or Sally Smith and Jane Smith, registered domestic partners as community property. Another example for same sex couples: Sally Smith and Jane Smith, who are married to each other, as community property.
2. Community Property with Right of Survivorship:
A form of vesting title to property owned together by spouses or by domestic partners. This form of holding title shares many of the characteristics of community property but adds the benefit of the right of survivorship similar to title held in joint tenancy. There may be tax benefits for holding title in this manner. On the death of an owner, the decedent’s interest ends and the survivor owns all interests in the property. For example: Bruce Buyer and Barbara Buyer, husband and wife, as community property with right of survivorship, or John Buyer and Bill Buyer, husband and husband, as community property with right of survivorship. Another example for same sex couples: Sally Smith and Jane Smith, registered domestic partners, as community property with right of survivorship.
3. Joint Tenancy:
A form of vesting title to property owned by two or more persons, who may or may not be married or domestic partners, in equal interests, subject to the right of survivorship in the surviving joint tenant(s). Title must have been acquired at the same time, by the same conveyance, and the document must expressly declare the intention to create a joint tenancy estate. When a joint tenant dies, title to the property is automatically conveyed by operation of law to the surviving joint tenant(s). Therefore, joint tenancy property is not subject to disposition by will. For example: Bruce Buyer, a married man and George Buyer, a single man, as joint tenants.
Note: If a married person enters into a joint tenancy that does not include their spouse, the title company insuring title may require the spouse of the married man or woman acquiring title to specifically consent to the joint tenancy. The same rules will apply for same sex married couples and domestic partners.
4. Tenancy in Common:
A form of vesting title to property owned by any two or more individuals in undivided fractional interests. These fractional interests may be unequal in quantity or duration and may arise at different times. Each tenant in common owns a share of the property, is entitled to a comparable portion of the income from the property and must bear an equivalent share of expenses. Each co-tenant may sell, lease or will to his/her heir that share of the property belonging to him/her. For example: Bruce Buyer, a single man, as to an undivided 3/4 interest and Penny Purchaser, a single woman, as to an undivided 1/4 interest.
Other ways of vesting title include:
1. A Corporation*:
A corporation is a legal entity, created under state law, consisting of one or more shareholders but regarded under law as having an existence and personality separate from such shareholders.
2. A Partnership*:
A partnership is an association of two or more persons who can carry on business for profit as co-owners, as governed by the Uniform Partnership Act. A partnership may hold title to real property in the name of the partnership.
3. Trustees of a Trust*:
A Trust is an arrangement whereby legal title to property is transferred by a grantor to a person called a trustee, to be held and managed by that person for the benefit of the people specified in the trust agreement, called the beneficiaries. A trust is generally not an entity that can hold title in its own name. Instead title is often vested in the trustee of the trust. For example: Bruce Buyer trustee of the Buyer Family Trust.
4. Limited Liability Companies (LLC)*:
This form of ownership is a legal entity and is similar to both the corporation and the partnership. The operating agreement will determine how the LLC functions and is taxed. Like the corporation its existence is separate from its owners.
*In cases of corporate, partnership, LLC or trust ownership - required documents may include corporate articles and bylaws, partnership agreements, LLC operating agreements and trust agreements and/or certificates.
Remember, how title is vested has important legal consequences and tax consequences. The tax consequences may be different for same sex legally related couples. You may wish to consult an attorney or tax advisor to determine the most advantageous form of ownership for your particular situation.
What is Title Insurance?
A title insurance policy protects a real estate owner or lender against any damage they might experience because of liens, encumbrances, or defects in the title to said property, or the incorrectness of the related search. It is an insurance policy that protects against loss should the condition of title to land be other than as insured.
How Does Title Insurance Differ from Casualty Insurance?
Casualty Insurers (car, life, health, etc.) assume risk for future events, collecting monthly or annual premiums. A title policy insures the past of the real property and the people who owned it, for a one-time premium paid at the close of escrow.
What Does Title Insurance Cover?
Title insurance protects against claims from various defects such as another person claiming an ownership interest, items improperly recorded, fraud, forgery, liens, encroachments, easements and other items that are specified in the actual policy.
Who Needs It?
Purchasers and lenders need title insurance to know the property they are involved with is insured against various possible title defects. Whether it's a sale, refinance or construction loan, the seller, buyer and lender all benefit. At the mere hint of a claim adverse to your title, you should contact your title insurer or the agent who issued your policy. Title insurance includes coverage for legal expenses which may be necessary to investigate, litigate or settle an adverse claim.
How is a Title Policy Created?
After the escrow officer or lender opens the title order, the title company begins a search of the public records including the County Recorder, Federal and State Agencies, and County and City Offices. A Preliminary Report is issued to the customer for review and approval. All closing documents are recorded upon escrow's instruction. When Recording has been confirmed, demands are paid, funds are disbursed, and the actual title policy is typed and sent to the insured.
What Types of Policies are Available?
A standard CLTA 'Owners' policy insures the new owner (the home buyer) and an ALTA or CLTA 'Lenders' policy insures the priority of the lender's security interest. An extended coverage ALTA-R (residential) policy to owners of 1-4 unit property is also offered. The ALTA Homeowner's Policy is for owners of 1-4 unit properties as well and expands the number of covered title risks to 29, including certain specified risks that may arise in the future.
Why to obtain Title Insurance
- Title Insurance will protect you against a loss on your home or land due to a title defect
- A deed or mortgage in the chain of title may be a forgery
- Claims constantly arise due to marital status and validity of divorces.
- A deed or mortgage may have been made by an incompetent or under-aged person.
- A deed or mortgage made under an expired power of attorney may be void
- A deed or mortgage may have been made by a person with the same name as the owner.
- A child born after the execution of a will may have interest in the property.
- Title transferred by an heir may be subject to a federal estate tax lien.
- An heir or other person presumed dead may appear and recover the property or an interest.
- A judgment regarding the title may be voidable because of some defect in the proceeding.
- By insuring the title, you can eliminate delays when passing your title on to someone else.
- Title Insurance reimburses you for the amount of your covered loss.
- Title Insurance helps speed negotiations when you're ready to sell or obtain a loan.
- A deed or mortgage may be voidable if signed while the grantor was in bankruptcy.
- Claims have risen dramatically over the last 30 years.
- There may be a defect in the recording of a document upon which your title is dependent.
- Title Insurance covers attorney fees and court costs.
- Many lawyers protect their clients as well as themselves by procuring title insurance.
- A deed or mortgage may have been procured by fraud or duress.
- A title policy is paid in full by the first premium for as long as you own the property.
Types of title insurance policies
CLTA Standard Coverage Policy (1990) Provides title insurance coverage to owners and/or lenders with insurable interests in real property. Basically insures against loss or damage by reason of matters appearing in the public records, as defined.
ALTA Owners Policy (1/17/92) Provides title insurance coverage to owners with insurable interests in real property. This is usually requested as an "extended coverage" policy, but may be issued as a "standard coverage" policy as well.
ALTA Residential Title Insurance Company (6/2/87) (ALTA-R) Provides title insurance coverage, written in "plain language." Limited to owners of a one-to-four family residential lot or condominium unit. Includes limited coverage for certain matters such as encroachments, mechanic's liens and violations of restrictions or zoning.
ALTA Homeowner's Policy of Title Insurance for One-To-Four Family Residence (10/17/98) Provides title insurance coverage to owners of improved one-to four family residential property. Expands the number of covered title risks to 29, including certain specified risks that may arise in the future. Provides for payment of a "deductible" in some instances. Our maximum coverage policy (ALTA Homeowners Policy of Title Insurance) can be had for the applicable premium plus an additional 10% of that premium.
Understanding the Preliminary Title Report
A preliminary report is designed to facilitate the issuance of a particular type of policy. The preliminary report identifies the title to the estate or interest in the described land. It also contains a list of defects, liens and encumbrances and restrictions which would be excluded from coverage if the requested policy were to be issued as of the date of the report, together with a disclosure of selected policy boilerplate provisions attached as an exhibit to each report.
A Realtor® will often obtain a copy of the preliminary report in order to discuss the matters set forth in it with his or her clients. Thus, a preliminary report provides the opportunity to seek the removal of items referred in the report which are objectionable to the prospective insured. Such arrangements can be made with the assistance of the escrow company.
Preliminary reports are furnished in connection with an application for title insurance and are offers to issue a title policy subject to the stated exceptions set forth in the reports and such other matters as may be incorporated by reference therein. The reports are not abstracts of title, nor are any of the rights, duties or responsibilities applicable to the preparation and issuance of an abstract of title applicable to the issuance of any report. Any such report shall not be construed as, or constitute a representation as to the condition of title to real property, but shall constitute a statement of the terms and conditions upon which the issuer is willing to issue its title policy, if such offer is accepted.
The Purpose of a Preliminary Report is to show the following in written form:
- Legal Description
- Tax and Bond Information
- Easements and CC&R's
- Defects in title and requirements
- Trust Deeds (loans)
- Personal recorded liens on buyers and sellers
The Processing of a Preliminary Report begins with searching the following:
- Verify legal and address to make sure we are searching the correct property.
- Start at the last point of insurance we have (starter.)
- Run a complete chain of title on P.I.Q. (property in question) from our last starter date to today. The items covered by this part of the search are items 1,2,3,5,7 in category #1.
- Use of our back up system (Grantor/Grantee) when any flaws or breaks appear in the chain of title.
- Run the buyers, sellers and former owners on the General Index for recorded personal liens.
- Attach a map identifying our property.
Followed by Examination of Title:
- Review everything in title search.
- Examine the documents in chain of title for execution of signatures and possible forgeries.
- Prepare the items to be shown in the report by using our computer coding system.
- Set for the any conditions which will need to be met before we can issue a policy of title insurance.
- Send to typist with complete write-up (instructions) as to what is to be shown in the report.
Followed by Typing and Proofing:
The report is typed in to a disc retrieval system. This will store information on a memory system for use in producing our title policy at a later date. The typed report is then reviewed by another person for accuracy and returned to the title unit.
Understanding a Mechanics lien
California Mechanic's Lien law provides special protection to contractors, subcontractors, laborers and suppliers who furnish labor or materials to repair, remodel or build your home.
If any of these people are not paid for the services or materials they have provided, your home may be subject to a mechanic's lien and eventual sale in a legal proceeding to enforce the lien. This result can occur even where full payment for the work of improvement has been made by the homeowner.
The mechanic's lien is a right that California gives to workers and suppliers to record a lien to ensure payment. This lien may be recorded where the property owner has paid the contractor in full and the contractor then fails to pay the subcontractors, suppliers, or laborers. Thus, in the worst case, a homeowner may actually end up paying twice for the same work.
Why, you may ask, can a homeowner be placed in the impossible situation of having to pay twice for the same work? The answer lies in the Constitution and laws of California. The overriding theory behind the mechanic's lien law is that between two potentially blameless parties, the homeowner who has ordered the work and made full payment of the agreed amount and obtained the value of the work is in a better position to bear the loss than the laborer or supplier who has provided work or materials to the job site and has not been paid for his efforts by the contractor. It is the homeowner who bears the ultimate responsibility for making payment for services rendered. The theory is that the value of the property upon which the labor or materials have been bestowed has been increased by virtue of these efforts and the homeowner who has reaped this benefit is required in return to act as the ultimate guarantor of full payment to the persons responsible for this increase in value. In practice, a homeowner faced with a valid mechanic's lien may be compelled to pay the lien claimant and then pursue conventional legal remedies against the contractor or subcontractor who initially failed to pay the lien claimant but who himself was paid by the homeowner. Another justification for this result relates to the relative financial strengths of the parties to a work of improvement. The law views the property owner as being in a better situation to absorb the financial setback occasioned by having to pay the amount of a valid mechanic's lien, as opposed to a laborer or material man who is viewed as being less able to absorb the financial burdens occasioned by not being paid for services or materials provided in connection with a work of improvement.
The best protection against these claims is for the homeowner to employ reputable firms with sufficient experience and capital and/or require completion and payment bonding of the construction work. The issuance of checks payable jointly to the contractor, material men and suppliers is another protective measure, as is the careful disbursement of funds in phases based upon the percentage of completion of the project at a given point in the construction process. The protection offered by mechanic's lien releases can also be helpful.
Even if a mechanic's lien is recorded against your property you may be able to resolve the problem without further payment to the lien claimant. This possibility exists where the proper procedure for establishing the lien was not followed. While it is true that mechanic's liens may be recorded by persons who have provided labor, services, or materials to a job site, each is required to strictly adhere to a well-established procedure in order to create a valid mechanic's lien.
Needless to say, this is one area of the law that is very complex, thus it may be worthwhile to consult an attorney if you become aware that a mechanic's lien has been recorded against your property. In the event you discover that a lien has been recorded but no effort has been made to enforce the lien, a title company may decide to ignore the lien. However, be prepared to be presented with a positive plan to eliminate the title problems created by this type of lien. This may be accomplished by means of a recorded mechanic's lien release from the person who created the lien, or other measures acceptable to the title company.
As in all areas of the real estate field, the best advice is to investigate the quality, integrity, and business reputation of the firm with whom you are dealing. Once you are satisfied you are dealing with a reputable company and before you begin your construction project, discuss your concerns about possible mechanic's lien problems and work out, in advance, a method of ensuring that they will not occur.
An Uninsured Deed
An uninsured deed is a deed recorded without the benefit or guarantees provided by title insurance. Title insurance acts as a protection against claims which may arise against you and is required by lenders in purchase and refinance transactions. Most common problems from uninsured Deed's come form Quitclaim deeds between family members, especially husband and wife.
Title companies will often times require additional paperwork and notarizations for transfers of title that were recorded by an uninsured deed. Possible signs of an uninsured deed:
- No accommodation stamp.
- No title company or title company title order number.
- No escrow number showing on document.
- No document stamp showing under the fee section.
- Handwritten document.
- Time recorded is not 8:00 am in the morning.
The following items require added clearance and processing time for escrow and title. Avoid delays by providing as much information as you can as soon to your Realtor as possible:
- Establishing Fact of Death-Joint Tenancy
- Use of and Proper Execution of Power of Attorney
- Family Trust
- Business Trust
- Recent Construction
- Physical Inspection Findings - Encroachments, Off-Record Easements
- Clearing Liens, Judgments
- Clearing Child/Spousal Support Liens
- Proper Execution of Documents
- Proper Jurats, Notary Seals
- Transfers/Loans Involving Corporations/Partnerships
- Last Minute Changes in Buyers
- Last Minute Changes in Coverage