A cloud on title can prevent the legal transfer of full ownership of a property from seller to buyer. Buying a property with a cloud on the title and creating serious complications — emotionally and financially.
In this article, we’ll explore:
- The most common types of clouds on title
- How to resolve a cloud on title
- How to prevent a cloud on title
- And more
Let’s get started!
What is a Cloud on Title?
The purchase of a property can be a lengthy and complicated process. This can be worsened when questions about ownership interest of the property arise.
A cloud on title is a reference to any title defect which may prevent the legal transfer of full ownership of a property from seller to buyer.
These clouds on title can include:
- Incorrect official property descriptions
Knowing if there is a cloud on title and how to resolve it to a clean title is key to ensuring a smooth transaction.
Keep in mind that a cloud on title can be used to your advantage.
In the right situation, a cloud on title can be used by a buyer to negotiate down a price.
Because a cloud on title can lower the value of a property, this provides an attractive opportunity to investors willing — keyword willing — to sort out any title defects.
Next, we’ll take a look at a situation when it isn’t advantageous — and it’s actually a nightmare.
A Cloud on Title Example (or Nightmare) You Don’t Want To Find Yourself In
Let’s take a look at a stress-inducing example of a cloud on title.
Let’s say a buyer in their local market sees an attractive investment property that is being sold by the child of the deceased previous owner.
The buyer smartly decides to buy title insurance. The title search reveals a clean title, so it seems that it wasn’t necessary.
Months after the sale is completed, just as a tenant is moving in, a newly found will reveals that the seller’s sibling also had an interest in the property.
This leaves the buyer with a cloud on title. Panic floods the buyer’s veins.
Because the buyer bought title insurance, the title insurance company is liable for resolving the cloud on title. Upon remembering this, the buyer exhales for what feels like the first time all day.
The title insurance company will then work with the seller and their sibling to file a quitclaim deed, resolving the cloud on title. In time, this action leaves the buyer with a clean title.
Had the buyer not bought title insurance, he or she could face many time-consuming challenges trying to resolve the cloud on title, such as negotiating with the seller’s sibling, going to court, or more.
This is why it’s so important, whether you are a homeowner or real estate investor, to understand the full implications of a cloud on title.
The 5 Most Common Clouds on Title
Here are a few of the most common clouds on titles.
An incorrectly recorded address or boundary line on a deed can cloud a title. For example, more than one survey of the property may exist.
This means the property may be larger or smaller than advertised — a critical detail to know before buying a property.
#2: Illegal Deeds
A seller can appear to have a clean title of the property. However, someone in the previous chain of ownership may have illegally sold the property.
This means third-party members could have claim to your property and create a cloud on title.
#3: Probate and Ownership Dispute
Another issue that may arise is that previous owners in the chain of titles may not have had a full legal interest in the property.
A cloud on title can occur when a spouse or sibling of a previous grantor may not have surrendered their interest after failing to properly execute a quitclaim deed.
Easements are property access rights granted to non-owners.
All easements should be properly recorded on a clean title — undisclosed easements can cloud a title.
These can include:
These grant the use of designated pieces of land to utility companies.
These limit the amount and type of development that can occur on a property. For example, 25 million acres of land in the US are held in conservation easements.
These allow neighboring property owners to use your property to access their own.
Unpaid taxes, utilities, and missed mortgage payments are examples of liens that can cloud a title.
4 Ways To Resolve a Cloud on Title
Next, we’ll look at how to resolve a cloud on title.
#1: Title Insurance
The most important step a buyer can take is reducing liability.
As seen in the previous example, a title search and title insurance are key to reducing a buyer’s liability in the case that title problems surface.
Surveyors can also be an important asset to buyers. Often provided by the title insurance company, these surveyors will determine items such as:
- The chain of ownership
- Clarify the boundary lines
- Report any easement agreements that may be in place
With nearly 5,500 different agencies issuing title insurance, a buyer has a range of options to choose what fits them best — and is the best way to resolve a cloud on title.
#2: Quitclaim Deeds
Incorrect or misspelled titles, possible past ownership interests, and unwanted easements can be resolved with the filing of a quitclaim deed.
Simply put, a quitclaim deed corrects title errors and waives the transferrer of any claim to the property.
In some cases, buyers may negotiate payment to those with interests, a route that is quicker than filing a lawsuit to issue a clean title.
Be aware, however, that a quitclaim deed makes no warranty towards the transferrer’s ownership claims.
#3: Paying Off Liens
Though costly, in the case of a cloud on title due to liens placed against a property, a buyer can choose to pay any:
- Debtholders, such as banks or builders.
- Government agencies in the case of back taxes.
- Any relevant entities due to unpaid utilities.
#4: Quiet Title
A buyer can also file a petition to quiet title.
A quiet title action granted by the court demands that the seller be liable for any liens against a property — not the buyer.
If granted, a quiet title would surrender all claims to the property other than the current owner.
Preventing a Cloud on Title
The best way to resolve a cloud on title is to avoid it all together.
How can you do that?
It is important for a property owner to check with their public records office that:
- all information and descriptions on their title are correct
- all easements are recorded
- liens are paid off to prevent a cloud on title
If you find a cloud on title, it’s important to factor that into your decision to buy or walk away from a property.
The Bottom Line: Cloud on Title
As is the case with all real estate transactions, two of the most important items — especially when dealing with a cloud on title — are consulting a real estate legal professional and increasing your real estate education to ensure that your next home or your next real estate deal is your best one yet.