Principles of Real Estate Chapter 16-Title Summary This chapter will detail the recording and notice processes, explain the importance of title insurance, and explain the processes used to record title. Overview Objectives At the end of this chapter, the student will be able to: Describe "constructive notice" and explain the importance of recording documents List the provisions of "Recording Acts" Name and describe the two indexing systems used in the U.S. Expound on "Constructive Notice" versus "Actual Notice" Define Chain of Title Define "Abstract of Title" Point out the purpose and importance of title insurance 16.1 P a g e
Define subrogation List the two types of title insurance Describe the Torrens System, its origin and its current applications Define marketable title acts and their purpose Public Records In all states, public records are maintained by designated officials as required by the state's laws. These include records maintained by: Recorder of deeds County clerk County treasurer City clerk Collector Clerks of various courts of record Public Records and Statutes Records involving taxes, special assessments, ordinances, and zoning and building records fall into the category of public records. Keep in mind: 16.2 P a g e
The principle expressed by the original statute of frauds has long been enacted into all state laws, so no transfer of real estate should be enforceable unless it is in writing. Written instruments are required for all transfers of title or interest, whether by deed, mortgage, or lease. The exception is leases for less than a year, which are not required by statute to be in writing. In addition to the statute of frauds, which requires that instruments affecting interests in real estate be in writing, many state legislatures have also passed laws that require owners or parties interested in real estate to record, or file, in the public records all documents affecting their interest in real estate in order to give legal, public, and constructive notice to the world of their interest. These statutory enactments are commonly referred to as recording acts. All states have laws that provide that a deed or mortgage may not be effective as far as later purchasers are concerned unless such documents have been recorded. Recording Acts Under the recording acts, in order to give constructive notice, all instruments in writing affecting any estate, right, title, or interest in land must be recorded in the county where the land is located. The purpose of this requirement is to give to everyone interested in the title to a parcel of property notice of the various interests of all other parties. From a practical point of view, the recording acts give legal priority to those interests that are recorded first. To be eligible for recording, an instrument must be drawn and executed in conformity with the provisions of the recording statutes of the state in which the real estate is located, and acknowledged. The prerequisites for recording are not uniform. For example, many states require that the names be typed below the signatures on a document and that the instrument be acknowledged before a notary public or other officer. In a few states, the instrument must also be witnessed. A number of states require that the name of the attorney who prepared the document also appear on it. 16.3 P a g e
Indexing Systems Once a document has been properly acknowledged, it is capable of being recorded in the public records. Documents are recorded in accordance with one of two indexing systems: The tract index is the simplest to use. In it, one page is allocated to either a single parcel of land or to a group of parcels, called a tract. On that page you will find listed all the recorded deeds, mortgages and other documents at the recorder's office that relate to that parcel. A few words describing each document are given, together with the book and page where a photocopy of the document can be found. Grantor and grantee indexes are alphabetical indexes and are usually bound in book form. There are several variations in use in the United States, but the basic principle is the same. For each calendar year, the grantor index lists in alphabetical order all grantors' names in the documents recorded that year. Next to each grantor's name is the name of the grantee named in the document, the book and page where a photocopy of the document can be found, and a few words describing the document. The grantee index is arranged by the grantee names and gives the name of the grantor and the location and description of the document. 16.4 P a g e
Notice Through the legal maxim of caveat emptor, the courts charge a prospective real estate buyer or lender with the responsibility of inspecting the property and searching the public records to ascertain the interests of other parties. There are two types of notice: Constructive Notice Actual Notice Constructive Notice Constructive notice is a presumption of law that charges a buyer with the responsibility of learning this information. The information is available; therefore, the buyer or lender is responsible for learning it. Failure to do so is no defense for not knowing of a right or interest, since the recording of that interest in the public records or possession of the real estate gives notice to the world, or constructive notice, of an individual's rights in the property. Actual Notice Actual Notice is what the person actually knows. Once an individual has searched the public records and inspected the property, he or she has actual notice, or knowledge, of the information learned. An individual is said to have actual notice of any information of which he or she has direct knowledge. If it can be proven that an individual has actual knowledge of information concerning a parcel of real estate, he or she cannot rely on a lack of constructive notice, such as unrecorded deed or an owner who is not in possession. 16.5 P a g e
Priority of Rights 16.6 P a g e Many complicated situations can arise that affect the priority of rights in a parcel of real estate. For example, a purchaser may receive a deed and take possession of the property but not record the deed. By taking possession, a purchaser gives constructive notice that he or she has an interest in the land. Such a purchaser's rights would be considered superior to the rights of a subsequent purchaser who acquired a deed from the original owner at a later date and recorded the deed but did not inspect the property to determine who was in possession. How the courts rule in any situation depends, of course, on the specific facts of the case. Chain of Title State statutes generally require that recorded instruments must be within the chain of title, so that a search of the grantor-grantee indexes will reveal the document and the interest. Thus, when a mortgage executed by a purchaser is recorded prior to the recording of the deed of conveyance to the purchaser (who becomes the mortgagor), there is no notice to the world that the mortgagor had an interest to convey because the mortgage is not within the chain of title. However, the mortgage could become constructive notice if the deed was dated on or before the date of the mortgage. Then when the mortgage was recorded, it would be properly indexed by date to show that the purchaser obtained title on or before the date when he or she executed the mortgage. Keep in mind: The chain of title shows the record of ownership of the property over a period of time, depending on the length of the title search. An abstract of title is a condensed history of all the instruments affecting a particular parcel of land.
In the United States, chains of title in colonial states frequently date back to a grant from the king of England. In those states admitted to the union after the formation of the United States, the deeds of conveyance in the chain of title generally stem from the patent issued by the U.S. government. In a few states, such as Louisiana and Texas, the chains of title date back to a point prior to acquisition of the land by the federal government. Through the chain of title, the ownership of the property can be traced from its origin to its present owner. If this cannot be done, it is said that there is a gap in the chain. In such states, it is usually necessary to establish ownership by a court action called a suit to quiet title. Evidence of Title When dealing with an owner of real estate, a purchaser or lender requires satisfactory proof that the seller is the owner and has good title to the property. The owner is generally required to produce documentary proof called evidence of title. There are four forms of title evidence: Abstract of title and lawyer's opinion Title insurance policy Torrens certificate Certificate of title Sometimes the question is raised as to whether a recorded warranty deed or other form of conveyance is evidence of title. A deed is not considered evidence of title; while it conveys the interest of the grantor, even a warranty deed contains no proof of the kind or condition of the grantor's title. The only effective proof must be one of the evidences of title, based upon an adequate search of the public records to ascertain the ownership interests and condition of the title. 16.7 P a g e
Title Insurance A title insurance policy is a contract by which a title insurance company agrees, subject to the terms of its policy, to indemnify (that is, to compensate or reimburse) the insured (the owner, mortgagee, or other interest holder) against any losses sustained as a result of defects in the title other than those exceptions listed in the policy. The title company agrees to defend, at its own expense, any lawsuit attacking the title if the lawsuit is based on a defect in title against which the policy insures. When a title company makes a payment to settle a claim covered by a policy, the company acquires by the right of subrogation all the remedies and rights of the insured party against anyone responsible for the settled claim. Title companies issue various forms of title insurance policies, the most common of which are the owner's title insurance policy, called a mortgagor's policy, and the lender's policy, called the mortgagee's policy. The policy protects the owner, the owner's heirs, and devisees. This policy is not assignable and goes with the owner upon sale of the property. The mortgagee's policy protects only the lender and the loan. If the loan should be assumed, the coverage remains intact but when the loan is ultimately paid off the liability to the insurer is erased. The Torrens System The Torrens system of land title registration was developed in 1857 by an Australian, Sir Robert Torrens, who took the idea from the system of registering title to shipping vessels. Approximately 10 states have 16.8 P a g e
adopted the Torrens system; it is also popular in Canada. In the states that have adopted the Torrens system, the established recording system is also still in use. Registration of land titles is not compulsory. The owner of real estate may continue under the standard recording system or may register his or her title under the Torrens system. Although the provisions of the Torrens system are not uniform, the procedures to be followed in registering land titles in the various states are substantially the same. They include: 16.9 P a g e A written application to register a title to real estate is made with the county court of the county in which the real estate is located. The application lists all facts regarding the title and liens against the real estate. A court hearing is held, and all those known to have an interest in the real estate are given notice. Any interested person may appear to present a claim. If the applicant proves that he or she is the owner, the court enters an order for the registration of the real estate, and the registrar of titles, also known as the title examiner, is directed to register the title. Once real estate is registered under the Torrens system, a certificate of title is prepared by the registrar, who keeps the original and issues a duplicate to the owners of the property. At the same time, signature cards are signed by the owners in order to protect them from forgery. Certificate of Title When a title to registered property is conveyed, mortgaged, or encumbered in any way, the owner delivers the deed, mortgage, or other instrument to the grantee, mortgagee, or encumbrancer, together with the owner's duplicate certificate of title. When these documents are presented to the registrar for examination and approval, he or she checks the signatures with the signature cards. When everything is in order, the registrar registers the transfer or document. A deed to Torrens-registered land does not pass ownership. It is the registration that transfers title to the grantee. If such property is mortgaged, the registrar of titles issues a mortgagee's duplicate
certificate of title to the lender. Torrens registrars usually retain all original documents delivered to them for registration. At any time, the Torrens original certificate of title in the registrar's office reveals the owner of the land and all mortgages, judgments, and similar liens. This record exists because a mortgage judgment or other lien is not valid until it has been entered on the original title certificate by the registrar. Under most state land registration acts, title to Torrens registered property can never be acquired through a claim of adverse possession. This gives an owner of registered land protection against such claims. Under the Torrens system, a certificate of title is issued instead of a title insurance policy. The certificate does not set forth a dollar amount. If a claim or suit regarding title arises, the holder of a Torrens certificate must defend the suit at his or her own expense and prove loss in order to gain a right to any compensation from the registrar. The registrar of titles is not required to go to court to defend a certificate holder. State laws generally provide that a certificate holder who has suffered a loss as a result of a registrar's mistake may file a claim against an indemnity fund established to compensate people financially for bona fide losses. Some state laws permit an owner to remove the title to his or her land from Torrens registration. In other states, land once registered must remain under the Torrens system. Marketable Title Act A least 10 states have a Marketable Title Act (marketable title is title that is free of defects.) This is not a system of title registration. Rather, it is legislation aimed at making abstracts easier to prepare and less prone to error. This is done by cutting off claims to rights or interests in land that have been inactive for longer than the act's statutory period. In Connecticut, Michigan, Utah, Vermont and Wisconsin, the time period is 40 years. Thus, in these states, a person who has an unbroken chain of title with no defects for at least 40 years is regarded by the law as having marketable title. Any defects more than 40 years old are outlawed. The result is to concentrate the title search process on the immediate past 40 16.10 P a g e
years. Thus, abstracts can be produced with less effort and expense, and the chance for an error either by the abstracter or in the documents themselves is greatly reduced. This is particularly true in view of the fact that recordkeeping procedures in the past were not as sophisticated as they are today. In Review Under the recording acts, in order to give constructive notice, all instruments in writing affecting any estate, right, title, or interest in land must be recorded in the county where the land is located. In the tract index system, one page is allocated to either a single parcel of land or to a group of parcels, called a tract. On that page you will find listed all the recorded deeds, mortgages and other documents at the recorder's office that relate to that parcel. Grantor and grantee indexes are alphabetical indexes and are usually bound in book form. There are two types of notices: Constructive notice and actual notice. Constructive notice is a presumption of law that charges a buyer with the responsibility of learning this information. The information is available; therefore, the buyer or lender is responsible for learning it. Once an individual has searched the public records and inspected the property, he or she has actual notice, or knowledge, of the information learned. An abstract of title is a condensed history of all the instruments affecting a particular parcel of land. When dealing with an owner of real estate, a purchaser or lender requires satisfactory proof that the seller is the owner and has good title to the property. The owner is generally required to produce documentary proof called evidence of title. Abstract of title and lawyer's opinion, title insurance policy, Torrens certificate, and certificate of title are the four forms of title evidence. Title companies issue various forms of title insurance policies, the most common are the owner's title insurance policy, called a mortgagor's policy, and the lender's policy, called the mortgagee's policy. The Torrens system of land title registration was developed in 1857 by an Australian, Sir Robert Torrens. 16.11 P a g e