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Cloud on title

Cloud on title is a legal term that every homebuyer should know. Bankrate explains it.

What is cloud on title?

A cloud on title is any unresolved claim, lien or other encumbrance on a property that may prevent transfer of ownership from one party to another. Cloud on title notes that there is doubt related to the condition of the title deed that has to be resolved or cleared before transfer can take place.

Deeper definition

When a mortgage is taken out on a property, the mortgage holder will take a lien over the property. This means that the owner cannot sell the property without clearing the title. Liens can also be placed over a title for various other reasons, and these include IRS liens and legal judgments related to the property. In such circumstances, it is impossible for transfer of title to take place because there is cloud on title.

When this happens, the seller has three options:

  • Arrange for the lien to be lifted by paying off the debt.
  • Cancel the sale.
  • Initiate a quiet title lawsuit to clear the lien or encumbrance.

Not every cloud on title affects transfer of ownership. When land is subdivided, the developer may record conditions and restrictions that apply to that land. Also, there may be zoning requirements and recorded easements for services such as power lines. These don’t affect the transfer of the title. However, buyers should be made aware of these easements and conditions because they could affect how the property is used. For this reason, buyers should be careful of signing a purchase contract that is subject to easements of record and all easements must be documented on the title.

Cloud on title example

Jim purchased a property from an estate. During the title search, the agent discovered that an old mortgage was registered against the property, dating back 45 years. Realizing that this cloud on title was most likely a clerical error, the agent commenced an action to quiet title. This proved that the mortgage had, in fact, been paid off and closed, but for some reason the documentation was not properly processed. Following the successful quiet title action, Jim was able to proceed and the sale was closed.

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