LEARNING OBJECTIVES
When you've finished reading this Chapter, you should be able to:
     ► identify the various proofs of ownership.
    ► describe recording, notice, and chain of title issues.
    ► explain the process and purpose of a title search.
    ► distinguish constructive and actual notice.
    ► define the following terms: abstract of title; actual notice; attorney's opinion of title; certificate of title; chain of title; constructive notice; marketable title; priority; recording; suit to quiet title; title insurance; and title search.

REAL ESTATE PRACTICE & PRINCIPLES KEY WORD MATCH QUIZ --- CLICK HERE ---
I would encourage you to take this “Match quiz” now as a pre-chapter challenge to see how many of these key words or phrases you are familiar with. At the end of each chapter I recommend that you take the quiz again to reinforce these important keywords. Each page contains four words or phrases and you need to drag and drop the correct definition into the puzzle key. Each page is considered as a question, but there is no scoring and you can return to each chapter quiz as many times as needed to reinforce your memory. 

 WHY LEARN ABOUT... TITLE RECORDS?
Public records are just that: records that are open to the public. This means that anyone interested in a particular property can review the records to learn about the documents, claims, and other issues that affect its ownership. A prospective purchaser, for example, needs to be sure that the seller can convey title to the property. If the property is subject to any liens or other encumbrances, a prospective buyer or lender needs to know that information. Typically, the attorney or title company performs a search of the public records to ensure that good title is being conveyed. Still, it is important for a professional in the real estate industry to understand what is in the public record and what the searchers are likely to find. Your clients will want to know about every step of the process, and you need to explain to them what is being done on their behalf. ?

 PUBLIC RECORDS
Public records contain detailed information about each parcel of real estate in a city or county. These records are crucial in establishing ownership, giving notice of encumbrances, and establishing priority of liens. They protect the interests of real estate owners, taxing bodies, creditors, and the general public. The real estate recording system includes written documents that affect title, such as deeds and mortgages. Public records regarding taxes, judgments, probate, and marriage also may offer important information about the title to a particular property.

Public records are maintained by
► recorders of deeds,
► county clerks,
► county treasurers,
► city clerks,
► collectors, and
► clerks of court.

IN PRACTICE    Although we speak of prospective purchasers conducting title searches, the purchasers themselves rarely search the public records for evidence of title or encumbrances. Instead, title companies conduct searches before providing title insurance. An attorney also may search the title. A growing number of lending institutions require title insurance as part of the mortgage loan commitment.

Recording
Recording is the act of placing documents in the public record. The specific rules for recording documents are a matter of state law. However, although the details may vary, all recording acts essentially provide that any written document that affects any estate, right, title, or interest in land must be recorded in the county where the land is located to serve as public notice. That way, anyone interested in the title to a parcel of property will know where to look to discover the various interests of all other parties. Recording acts also generally give legal priority to those interests recorded first (the "first in time, first in right" or "first come, first served" principle discussed in Chapter 10).

To be eligible for recording, a document must be drawn and executed according to the recording acts of the state in which the real estate is located. For instance, a state may require that the parties' names be typed below their signatures or that the document be acknowledged before a notary public. In some states, the document must be witnessed. Others require that the name of the person who prepared the document appear on it. States may have specific rules about the size of documents and the color and quality of paper they are printed on. Electronic recording—using computers or fax machines, for instance—is permitted in a growing number of localities. Some states require a certificate of real estate value and the payment of current property taxes due for recording.

Notice
Anyone who has an interest in a parcel of real estate can take certain steps, called giving notice, to ensure that the interest is available to the public. This lets others know about the individual's interest. There are three basic types of notice: constructive notice, actual notice, and inquiry notice.

Constructive notice is the legal presumption that information may be obtained
by an individual through diligent inquiry. Properly recording documents in the public record serves as constructive notice to the world of an individual's rights or interest. So does the physical possession of a property. Because the information or evidence is readily available to the world, a prospective purchaser or lender is responsible for discovering the interest.

Actual notice means that not only is the information available but someone has been given the information and actually knows it. An individual who has searched the public records and inspected the property has actual notice. Actual notice is also known as direct knowledge. If an individual can be proved to have had actual notice of information, he or she cannot use a lack of constructive notice (such as an unrecorded deed) to justify a claim.

Inquiry notice is notice that the law presumes a reasonable person would obtain by making further inquiry into a property. For example, if a customer is considering buying a rural lot of land and, upon inspecting it, sees a dirt road cutting across the land that is not mentioned in the public records, the customer is expected to make further inquiry into the dirt road.

Priority
Priority refers to the order of rights in time. Many complicated situations can affect the priority of rights in a parcel of real estate—who recorded first; which party was in possession first; who had actual or constructive notice. How the courts rule in any situation depends, of course, on the specific facts of the case. These are strictly legal questions that should be referred to the parties' attorneys.

 FOR EXAMPLE    In May, Betsy purchased Grayacre from Andy and received a deed. Betsy never recorded the deed but began farming operations on the property in June. In November, Andy (who was forgetful) again sold Grayacre, this time to Carrie. Carrie accepted the deed and promptly recorded it. However, because Carrie never inspected Grayacre to see whether someone was in possession, Betsy has the superior right to the property even though Betsy never recorded the deed. By taking possession, a purchaser gives constructive notice of his or her interest in the land.

Unrecorded Documents
Certain types of liens are not recorded. Real estate taxes and special assessments are liens on specific parcels of real estate and are not usually recorded until some time after the taxes or assessments are past due. Inheritance taxes and franchise taxes are statutory liens. They are placed against all real estate owned by a decedent at the time of death or by a corporation at the time the franchise taxes became a lien. Like real estate taxes, they are not recorded.

Notice of these liens must be gained from sources other than the recorder's office. Evidence of the payment of real estate taxes, special assessments, municipal utilities, and other taxes can be gathered from paid tax receipts and letters from municipalities. Creative measures are often required to get information about these "off the record" liens.

Chain of Title
Chain of title is the record of a property's ownership. Beginning with the earliest owner, title may pass to many individuals. Each owner is linked to the next so that a chain is formed. An unbroken chain of title can be traced through linking conveyances from the present owner back to the earliest recorded owner.

If ownership cannot be traced through an unbroken chain, it is said that there is a gap in the chain. In these cases, the cloud on the title makes it necessary to establish ownership by a court action called a suit to quiet title. A suit might be required, for instance, when a grantor acquired title under one name and conveyed it under another name. Or there may be a forged deed in the chain, after which no subsequent grantee acquired legal title. All possible claimants are allowed to present evidence during a court proceeding; then the court's judgment is filed. Often, the simple procedure of obtaining any relevant quitclaim deeds (discussed in Chapter 12) is used to establish ownership.

Title Search and Abstract of Title
A title search is an examination of all of the public records to determine whether any defects exist in the chain of title. The records of the conveyances of ownership are examined, beginning with the present owner. Then the title is traced backward to its origin (or 40 to 60 years, depending on local custom). The time beyond which the title must be searched is limited in states that have adopted the Marketable Title Act. This law extinguishes certain interests and cures certain defects arising before the root of the title—the conveyance that establishes the source of the chain of title. Normally, the root is considered to be 40 years or more. Under most circumstances, then, it is necessary to search only from the current owner to the root.

Other public records are examined to identify wills, judicial proceedings, and other encumbrances that may affect title. These include a variety of taxes, special assessments, and other recorded liens.
 
A title search usually is not ordered until after the major contingencies in a sales contract have been cleared—for instance, after a loan commitment has been secured. Before providing money for a loan, a lender generally orders a title search to ensure that no lien is superior to its mortgage lien. In most cases, the cost of the tide search is paid by the buyer, although this is negotiable between the parties.

An abstract of title is a summary report of what the title search found in the public record. A person who prepares this report is called an abstractor. The abstractor searches all the public records, then summarizes the various events and proceedings that affected the title throughout its history. The report begins with the original grant (or root), then provides a chronological list of recorded instruments. All recorded liens and encumbrances are included, along with their current statuses. A list of all of the public records examined is also provided as evidence of the scope of the search.

IN PRACTICE   An abstract of title is a condensed history of those items that can be found in public records. It does not reveal such items as encroachments or forgeries or any interests or conveyances that have not been recorded.

Marketable Title
Under the terms of the typical real estate sales contract, the seller is required to deliver marketable title to the buyer at the closing. To be marketable, a title must
► disclose no serious defects and not depend on doubtful questions of law or fact to prove its validity;
► not expose a purchaser to the hazard of litigation or threaten the quiet enjoyment of the property; and
► convince a reasonably well-informed and prudent purchaser, acting on business principles and with knowledge of the facts and their legal significance, that he or she could sell or mortgage the property at a later time.

Although a title that does not meet these requirements still could be transferred, it contains certain defects that may limit or restrict its ownership. A buyer cannot be forced to accept a conveyance that is materially different from the one bargained for in the sales contract. However, questions of marketable title must be raised by a buyer before acceptance of the deed. Once a buyer has accepted a deed with unmarketable title, the only available legal recourse is to sue the seller under any covenants of warranty contained in the deed.

In some states, a preliminary title search is conducted as soon as an offer to purchase has been accepted. In fact, it may be customary to include a contingency in the sales contract that gives the buyer the right to review and approve the title report before proceeding with the purchase. A preliminary title report also benefits the seller by giving him or her an early opportunity to cure title defects.

 PROOF OF OWNERSHIP
Proof of ownership is evidence that title is marketable. A deed by itself is not considered sufficient evidence of ownership. Even though a warranty deed conveys the grantor's interest, it contains no proof of the condition of the grantor's title at the time of the conveyance. The grantee needs some assurance that he or she is actually acquiring ownership and that the title is marketable. A certificate of title, title insurance, or a Torrens certificate (discussed below) are commonly used to prove ownership.

Certificate of Title
A certificate of title is a statement of opinion of the title's status on the date the certificate is issued. A certificate of title is not a guarantee of ownership. Rather, it certifies the condition of the title based on an examination of the public records—a title search. The certificate may be prepared by a title company, a licensed abstractor, or an attorney. An owner, a mortgage lender, or a buyer may request the certificate.

Although a certificate of title is used as evidence of ownership, it is not perfect. Unrecorded liens or rights of parties in possession cannot be discovered by a search of the public records. Hidden defects, such as transfers involving forged documents, incorrect marital information, incompetent parties, minors, or fraud, cannot be detected. A certificate offers no defense against these defects because they are unknown. The person who prepares the certificate is liable only for negligence in preparing the certificate.

IN PRACTICE     You may have heard the phrase under color of title. This refers to a situation in which title is conveyed in a transaction by a written instrument (such as a deed or will) that is actually inadequate to legally transfer ownership, whether because it was incorrectly executed or because it was executed by someone who did not, in fact, hold title in the first place.

An abstract and attorney's opinion of title are used in some areas of the country as evidence of title. It is an opinion of the status of the title based on a review of the abstract. Similar to a certificate of title, the opinion of title does not protect against defects that cannot be discovered from the public records. Many buyers purchase title insurance to defend the title from these defects.

Title Insurance
Title insurance is a contract under which the policyholder is protected from losses arising from defects in the title. A title insurance company determines whether the title is insurable, based on a review of the public records. If so, a policy is issued. Unlike other insurance policies that insure against future losses, title insurance protects the insured from an event that occurred before the policy was issued. Title insurance is considered the best defense of title: The title insurance company will defend any lawsuit based on an insurable defect and pay claims if the title proves to be defective.

After examining the public records, the title company usually issues what may be called a preliminary report of title or a commitment to issue a title policy. This describes the type of policy that will be issued and includes
► the name of the insured party;
► the legal description of the real estate;
► the estate or interest covered;
► conditions and stipulations under which the policy is issued; and
► a schedule of all exceptions, including encumbrances and defects found in the public records and any known unrecorded defects.
 
 The premium for the policy is paid once, at closing. The maximum loss for which the company may be liable cannot exceed the face amount of the policy (unless the amount of coverage has been extended by use of an inflation rider). When a title company makes a payment to settle a claim covered by a policy, the company generally acquires the right to any remedy or damages available to the insured. This right is called subrogation.

Coverage.
Exactly which defects the title company will defend depends on the type of policy. A standard coverage policy normally insures the title as it is known from the public records. In addition, the standard policy insures against such hidden defects as forged documents, conveyances by incompetent grantors, incorrect marital statements, and improperly delivered deeds.

Extended coverage, as provided by an American Land Title Association (ALTA) policy, includes the protections of a standard policy plus additional protections. An extended policy protects a homeowner against defects that may be discovered by inspection of the property: rights of parties in possession, examination of a survey, and certain unrecorded liens.

Title insurance does not offer guaranteed protection against all defects. A title company will not insure a bad title or offer protection against defects that clearly appear in a title search. The policy generally names certain uninsurable losses, called exclusions. These include zoning ordinances, restrictive covenants, easements, certain water rights, and current taxes and special assessments.

Types of policies.
 The different types of policies depend on who is named as the insured. An owner's policy is issued for the benefit of the owner and his or her heirs or devisees. A lender's policy is issued for the benefit of the mortgage company. The amount of the coverage depends on the amount of the mortgage loan. As the loan balance is reduced, the coverage decreases. Because only the lender's interest is insured, it is advisable for the owner to obtain a policy as well.

A lessee's interest can be insured with a leasehold policy. Certificate of sale policies are available to insure the title to property purchased in a court sale.

The Torrens System
The Torrens system is a legal registration system used to verify ownership and encumbrances. Registration in the Torrens system provides evidence of title without the need for an additional search of the public records. Under the Torrens system, an owner of real property submits a written application to register his or her title. The application is submitted to the court clerk of the county in which the real estate is located. If the applicant proves that he or she is the owner, the court enters an order to register the real estate. The registrar of titles is directed to issue a certificate of title. The original Torrens certificate of title in the registrar's office reveals the owner of the land and all mortgages, judgments, and similar liens. It does not, however, reveal federal or state taxes and some other items. The Torrens system of registration relies on the physical title document itself; a person acquires title only when it is registered.

IN PRACTICE    The Torrens system is currently in use in fewer than ten states, and some of these states are in the process of phasing out Torrens registration altogether. Consult your state's law to determine whether the Torrens system is active in your area and whether new property transfers are subject to its procedures.

 UNIFORM COMMERCIAL CODE
The Uniform Commercial Code (UCC) is a commercial law statute that has been adopted, to some extent, in all 50 states. The UCC is concerned with personal property transactions; it does not apply to real estate. The UCC governs the documents when personal property is used as security for a loan.

For a lender to create a security interest in personal property, including personal property that will become fixtures, the UCC requires the borrower to sign a security agreement. The agreement must contain a complete description of the items against which the lien applies. A short notice of this agreement (called a financing statement or a UCC-1) must be filed. It identifies any real estate involved when personal property is made part of the real estate. Once the financing statement is recorded, subsequent purchasers and lenders are put on notice of the security interest in personal property and fixtures. Many lenders require that a security agreement be signed and a financing statement filed when the real estate includes chattels or readily removable fixtures.

 SUMMARY
The purpose of the recording acts is to give legal, public, and constructive notice to the world of parties' interests in real estate. The recording provisions have been adopted to create system and order in the transfer of real estate. Without them, it would be virtually impossible to transfer real estate from one party to another. The interests and rights of the various parties in a particular parcel of land must be recorded so that such rights are legally effective against third parties who do not have knowledge or notice of the rights.

Possession of real estate is generally interpreted as constructive notice of the rights of the person in possession. Actual notice is knowledge acquired directly and personally. Inquiry notice is notice presumed by the law that a person would further investigate property.

Title evidence shows whether a seller conveys marketable title. A deed of conveyance is evidence that a grantor has conveyed his or her interest in land, but it is not evidence of the title's kind or condition. Marketable title is generally one that is so free from significant defects that the purchaser can be ensured against having to defend the title.

Four forms of providing title evidence are commonly used throughout the United States: abstract and attorney’s opinion of title, certificate of title, Torrens certificate, and title insurance policy. Each form reveals the history of a title. Each must be later dated, or continued or revised to cover a more recet date.

Under the Uniform Commercial Code (UCC), the filing of a financing statement gives notice to purchasers and mortgagees of the security interests in personal property and fixtures on the specific parcel of real estate.