Cloud on Title: What it is, How it Works

What Is a Cloud on Title?

A cloud on title is any document, claim, unreleased lien, or encumbrance that might invalidate or impair a title to real property or make the title doubtful. Clouds on the title are usually discovered during a title search. Clouds on the title are resolved by initiating a quitclaim deed, which releases a person's interest in a property without stating the nature of the person's interests.

Any property that has liens or is under foreclosure is unattractive to potential buyers because they create a cloud on the title.

Cloud on Title Explained

A title search and title insurance are typically required by lenders as protection from any third-party claims or clouds on title to property used as collateral. Title searches and title insurance are required in the mortgage origination process.

Factors That Cause a Cloud on Title

A cloud on title usually stems from unresolved issues regarding the property. For example, foreclosure proceedings initiated by a mortgager in response to a borrower defaulting on the payment might preclude the delinquent borrower from selling the property to a third party while the foreclosure is underway.

The property may have liens from lenders or from contracts to which the property owner agreed. If a property holder has free and clear ownership of the real estate, they might use it as collateral for new financing to pay other expenses or debts. Such a transaction may include a lien being placed on the property until the debt is repaid.

Fast Fact

A cloud on title is also known as a defective title because it is difficult to discern who the proper owner is.

Property owners may discover that a mechanic’s lien was placed on the property if there was a problem involving payment for construction or redevelopment work that was contracted. The mechanic’s lien will remain in place until all labor and material costs have been resolved. A lien remains with the property rather than the property owner, which would force any buyer of the property to assume responsibility for resolving the associated issues. The discovery of this type of cloud on the title would likely discourage potential buyers from buying the property.

Probate issues—that result from an estate and inheritance matters—can also create a cloud on the title. Documents such as death certificates might be lost over time with older properties. This could raise questions about where final legal ownership rests. If a property owner passed away without defining in a will who would gain control of their estate or become the owner of the property, heirs might challenge each other in court for the property title.

Key Takeaways

  • A cloud on title is any encumbrance that puts a title to real property into question.
  • Examples of encumbrances are foreclosure proceedings, liens on a property, probate, or fraudulent titles.
  • Clouds on the title are resolved through a quitclaim deed.

Fraud can also lead to a cloud on the title. False deeds might be recorded as legitimate and create legal confusion as the ownership of the property is called into question.

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