Cloud on Title
What is 'Cloud on Title'
A cloud on title is any document, claim, unreleased lien or encumbrance that might invalidate or impair the title to real property or make the title doubtful. Clouds on title are usually discovered during a title search. Clouds on title are resolved through initiating a quitclaim deed or a commencement of action to quiet title.
BREAKING DOWN 'Cloud on Title'
A title search and title insurance are generally required by lenders as protection from any third-party claims or clouds on title to property that is used as collateral. Title searches and title insurance are required in the mortgage origination process.
Types of Issues That Can Cause a Cloud on Title
A cloud on title usually stems from unresolved issues regarding the property. This can include foreclosure proceedings initiated by a mortgager in response to a borrower defaulting on payment. Such activity, in many cases, precludes the possibility of the delinquent borrower selling the property to a third party while the foreclosure is underway.
The property may have liens on it from lenders or contracts the property owner agreed to. If a property holder had free and clear ownership of real estate they might use it as collateral for new financing to pay other expenses they may have. Such a transaction may include a lien being placed on the property until the debt is repaid.
Property owners may discover that a mechanic’s lien was placed on the property if there is some issue with repayment for construction or redevelopment work that was contracted. The mechanic’s lien will remain in place until such time as 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 take responsibility for resolving the associated issues. The discovery of this type of cloud on title would likely discourage potential buyers from furthering their efforts to buy the property.
Probate issues that result from estate and inheritance matters can also create a cloud on 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.
Fraud can also lead to a cloud on title. False deeds might be recorded as legitimate and create legal confusion as the ownership of the property is called into question.