What is 'Defective Title'
A defective title is a piece of property or asset that has a publicly-recorded encumbrance, such as a lien, mortgage or judgment. Because other parties can lay claim to the property or asset, the title cannot be legally transferred to another party. For example, a homeowner cannot sell a home if there is an outstanding tax lien on the property. The lien would first have to be cleared before any action can be taken on the property.
BREAKING DOWN 'Defective Title'
Because the property or asset cannot be legally transferred to another party, the title is considered to be unmarketable. If the title holder wants to be able to do anything, the encumbrances must first be taken care of.
Ways a Defective Title Can Disrupt a Transaction
If a sale is conducted and the property is found to have a defective title, the seller may be held liable for damages. Furthermore, the seller may lose all rights to the title.
A defective title can include circumstances where a third party could try to establish an estate right title or interest, in opposition to the owner’s title to the property. The wording of the title document could also make it unclear who is the true owner of the property. There may be inconsistencies between the wording of the title and local real estate standards regarding titles. Necessary signatures, for example that of a spouse or other co-owner, may be missing. The title could also be defective if proper procedures for filing real estate documents are not followed.
There could be issues with the title not being an absolute title. Rather, it might be a registered possessory title, which refers to landownership without the deed, or a qualified title, which means there are defects in the title that include legal restrictions.
If the deed is missing or destroyed, it could be a contributing factor in rendering a title defective. The deed might also be inaccurate or insufficient in its description of the property. There may also be stipulations that can affect ownership of the property – for example, under an estate contract.
In order to find a remedy to a defective title, a title search can be performed to determine who the true owner of the property is. If that is not sufficient, or ineffective, the property holder can pursue legal action called a quiet title, which would put it in the court’s hands to determine who the true title holder is.