Cloud on title refers to an unresolved issue in the chain of title for a property. It can be caused by deed error, ownership dispute, probate issue, boundary dispute, outstanding lien, and several other problems. Suppose an owner of a property cannot resolve a cloud on title. In that case, they won’t be able to transfer a clear title to the new buyer whenever they decide to sell the property, thereby making matters very complicated.
What is Cloud on Title?
When there’s a claim or dispute about the ownership of a property, that’s called a cloud on title. There are many different forms that a cloud on title can take, such as tax liens, improperly recorded documents, and probate issues.
What does this mean? It means that another party could potentially lay claim to the ownership of the property. For this very reason, title companies will not issue title insurance until the cloud on title, or the title defect gets resolved.
What causes a Cloud on Title?
As mentioned before, several issues can cause a cloud on title. The most common ones are:
- Liens: There are a lot of property owners who are aware of mortgage liens against their properties. You can say that the majority of them are aware. However, liens are known to take many different forms. If the property owners used a contractor to repair the property or for more extensive renovations, there could be a contractor lien that they’d have to remove. Tax liens and debt liens are very common when it comes to distressed properties. Other types include restrictions, covenants that affect the title, and HOA liens.
- Deed Errors: Errors on the deed can be another cause for cloud on title. Inaccurate dates, lack of notary seal, misspellings, and other common errors can affect the transfer of title.
- Foreclosure Errors: Suppose a foreclosure process is not followed by the law correctly; it would also be responsible for a cloud on title. Even if the buyer’s not purchasing a foreclosed home, an error of such nature can still pose a major issue. Errors in ownership change through foreclosure can severely affect the chain of title.
- Illegal Deed: If the previous deed was done by a minor or an illegal immigrant, it also causes a cloud on title. Depending upon the dowry laws of the state, if a married person tries to convey a deed without their spouse’s knowledge, it can also affect the enforceability of the deed. A missing deed or a destroyed deed will also cause a cloud on title.
- Forgeries: If a forged document makes its way into the property’s public record, legal ownership will be jeopardized.
- Probate Issues: Estate matters such as inheritance issues can also complicate the transfer of a title. For example, if a property owner dies without declaring heirs or if there are declared heirs, they cannot be located. The state will dispose of the property, but if later an heir does turn up with a claim to the property, the current owner will be in a legal kerfuffle.
- Boundary Issues: If a surveyor’s line of record title does not match up with the legal line of record title, it will cause a cloud on the title.
How to Remove a Cloud on Title
It all depends on the nature of the defect.
- Deed of Reconveyance: Executing a deed of reconveyance will remove the cloud if the lender has not released the lien or trust deed even though the mortgage has been paid off.
- Quit Claim Deed: Quit Claim Deeds are primarily used to transfer ownership between family members, such as when a couple gets divorced. Title companies use these deeds when someone could potentially claim ownership of a property. By executing a quitclaim deed, the potential claimant transfers their ownership interest.
Quiet Title Action: This is considered a last resort when a cloud on title cannot be removed through other methods. Quiet Title Action is a civil lawsuit used to settle the ownership of a property. If the claimant proves their case before a judge, they’re awarded full possession and are protected from future claims.