When a person purchases a property, they are in reality purchasing a title which gives the purchaser rights to the property. If a person purchases a property without a title, then they actually purchased nothing at all. Thus, the purchaser wants to ensure that they purchase a good title and title assurance becomes necessary.
Within the United States, there are three main ways to ensure title assurance:
- Title covenants (promises that the title are good)
- Title opinions based on the search of public records (lawyer advice)
Note that each method still leaves some gaps of assurance. Thus, purchasers usually utilize two or more methods.
Most contracts contain title covenants. However, most of the covenants depend on the type of deed received and the scope of the promises made within the deed.
- General Warranty Deed (Grantor warrants against all defects, before and after possession)
- Special Warranty Deed (Grantor warrants against all defects after possession)
- Quitclaim Deed (No warranties)
Within the general and special warranty deeds, there are typically six covenants including:
- Seisin (Actual ownership of portrayed conveyance)
- Right to Convey
- Against encumbrances
- Quiet enjoyment
- Further Assurances
The first three covenants are called present covenants. This means that a breach occurs at the time of deed delivery if the covenant is false. The remaining covenants are future covenants.
Brown v. Lober
389 N.E.2d 1188 (Ill. 19979).
The plaintiffs lost at trial court, then succeeded in appeal. This appeal was made by the defendants.
Was the breach of the covenant of seisin barred by the statute of limitations? Additionally, was there a breach of the covenant of quiet enjoyment?
A breach of the covenant of seisin occurs when the grantor issues more than they have. A claim may be made as long as the statute of limitations (10 years here) has not passed.
A breach of quiet enjoyment occurs when the grantee is actually or constructively evicted by the actual titleholder. If the land has been vacant, there is no constructive eviction.
Any action due to a breach of covenant of seisin is barred by the statute of limitations. Additionally, there is no breach of a covenant of quiet enjoyment. Reversed.
The plaintiffs had purchased title for 80 acres of land by the Bosts. About 20 years later, the plaintiffs made a contract with Consolidated Coal Company to mine coal from the land. However, the plaintiffs soon realized that they did not own title for all 80 acres, only owning about one third of the amount. As such, the plaintiffs renegotiated the deal to be about a third of the cost and sued the estate of the Bosts to cover the lost damages. The claims: breach of the covenants of seisin and quiet enjoyment.
The breach of the covenant of seisin occurred at the time the deed was transferred. Therefore, any action needed to be taken within 10 years of that time according to the statute of limitations. However, the action was taken nearly 20 years later. Thus, there can be no remedy for a breach of seisin.
As for the covenant of quiet enjoyment, there was breach. Discovery of an alternate title does not interfere with the covenant of quiet enjoyment unless the possessor of the other title claims possession of the land. Here, the land was vacant. No party had inhabited the sub terrain. As such, there was no constructive eviction and recovery is barred based on the title.
Also note that adverse possession is not an option because the parties did not actually start digging, instead only functioning above the land (the rights in question were mineral rights).
Title Opinions Based on Search of Public Records
The Recording Acts
- Determine what kind of jurisdiction is present (race, race-notice, or notice)
- Apply the jurisdiction to the problem
- Race – first to record
- Race-notice – last to convey without notice but first to record
- notice – last to convey
There are three kinds of notice:
- Actual notice – knowledge of prior interest
- Record notice – knowledge based on a reasonable search of the records
- Inquiry notice – knowledge based on investigating suspicious circumstances.
The case below deals with inquiry notice and if occupancy of a home is a “suspicious circumstance.”
Raub v. General Income Sponsors of Iowa, Inc.
176 N.W.2d 216 (Iowa 1970).
Raub is the plaintiff. General Income Sponsors was the defendant along with two banks. The defendants lost and the two banks (not General) appealed.
“Did the defendants have notice, either actual or constructive, that their mortgagor’s title had been obtained by fraud?”
Typically, possession of the property requires the ones receiving the title to inquire as to the validity of the deed. However, this is not the case if the person in possession of the property is the original grantor.
No notice was required. Affirmed in part, reversed in part.
Raub was the victim of fraud. Barczewski and Huffman were officers and agents of General Income who gained Raub’s trust and drained her financial standing by investing in their company. In addition to taking her life savings, Raub had given General Income her deed for exchange of stock certificate’s which she never received.
General Income then mortgaged the deed to two banks. These banks were also the victims of fraud, not knowing that the deed was obtained fraudulently.
The trial court set aside the deed, which the banks did not argue. However, the banks wished their lien to stay against the home to recover their damages, arguing that they had made the purchase in good faith. The district court disagreed, arguing that the banks should have had notice when they purchased the deed. As such, the banks appeal.
Here, the Supreme Court agrees that the deed should be set aside. Thus, part of the holding is affirmed in part. However, the Supreme Court disagreed that the bank had constructive notice. As such, the trial court is reversed and the liens must stay.
There is no evidence in the record to assert that the banks had constructive notice. At the time of deed delivery, General Income was still in good standing with Raub. Had the banks noticed the occupancy, went to Raub, and asked of her position, she would have said that everything was all fine. She had given the deed in exchange of stock and was paying rent as a tenant. Thus, the bank’s reasonable search would not have put them on notice.
This is especially true because Raub was the grantor. The grantor is often living in the home after a deed has passed on because they need a reasonable time to move. As such, when a grantor is the person occupying the home, there is no suspicious circumstances that require inquiry.
The Court is sympathetic to the losses of Raub. However, both parties were victims of fraud and the cost incurred should not shift to the other just because they are in a better position to cover those costs.
Notice that the recording acts protect mortgages, deeds, easements, etc. equally. Nothing in this case showed that there was anything wrong in the record. Although the deed was induced by fraud, the record was clean. As such, the question is whether the banks needed to be on inquiry notice. The answer is no. The record was clean and if they had investigated there would have been no suspicion. As such, the banks win and Raub becomes in debt to the home.
Title insurance is usually purchased to go along with the covenants promised in the deed. You can say that the purpose of insurance is to double cover any potential title defects. However, title insurance still has gaps, including exceptions and exclusions, so the covenants are still necessary.
Insurance is often provided to lenders and owners, using standard forms. The standard form for owners includes five parts:
- A cover page (scope)
- Exclusions (potential risks the company is not willing to cover such as encumbrances agreed to by the parties)
- Schedule A (specific details about the property and which parts are insured)
- Schedule B (exceptions based on specific property details)
- Conditions (procedure requirements)
Notice the difference between exclusions and exceptions. Exclusions are things the insurer will not cover in any policy while an exception is related to specific property defects. Notice also that the purpose of insurance is to cover hidden defects, thus covenants are designed to protect against the apparent defects.
Finally, insurance companies may have a duty to defend (pay attorney fees) and indemnify (compensate for losses).
The content contained in this article may contain inaccuracies and is not intended to reflect the opinions, views, beliefs, or practices of any academic professor or publication. Instead, this content is a reflection on the author’s understanding of the law and legal practices.