Legal And Equitable Title: An Overview
The terms "legal" and "equitable" are often used to describe various types of interests in property in the United States legal system. But what do they mean? "Legal" refers to that which actually exists, while "equitable" refers to that which is supposed to exist. Not everything that is supposed to exist does, of course, and, in the context of real estate transactions, this creates a number of issues pertaining to titles.
Two people can be in possession of a title, only one of which actually owns the property. To explain this: A legal title is only held by a person who has actual ownership of a property, but an equitable title refers to the right of a person to use and be able to transfer the property , even if he or she does not technically own it. It’s not uncommon for someone to have equitable rights in a home, whether or not he or she holds the legal title.
Whenever a sale of real property is going to take place, a closing is necessary to determine for sure who has legal title to the property. It is often assumed that a title search performed by a title insurance company will discover any existing liens and satisfy the mortgage lender, but this is not necessarily the case. Keep in mind that simply because a property has passed through the probate process does not necessarily mean it is free of claims by heirs, who may hold equitable title to the property. This doesn’t mean a title search is unnecessary, but there is no guarantee that it will always turn up all the relevant information.
Attributes of Legal Title
A legal title is a set of rights and obligations attached to an object or person such as real estate or possibly intellectual property. The legal title indicates the relationship between the person and the object and can have various terms and obligations. Some examples of legal titles include warrants in law, a domain name, or a property deed. The legal titleholder may execute the rights of use and control or enjoyment of others. The words "legal title" are often used in the opposite sense in the U.S., meaning that a person who holds legal title to property has de jure legal property rights. The present legal owner holds or possesses legal title.
A legal title generally means that the title is enforceable at law. The holder of the legal title has the right to transfer the title to another person, but he or she is not necessarily entitled to any benefits of ownership. Legal title may be distinguished from equitable or beneficial title. Equitable title refers to possession of property in equity, as distinguished from possession in law. Equitable title includes the beneficial interest in property as respected in equity. Because the words "legal" and "equitable" do not have the same meaning under all legal systems, the distinction is most often drawn by the use of the phrases "legal title" and "beneficial or equitable title." The title is said to be legal or beneficial, depending on which of the rights is being dealt with at the time.
Defining Equitable Title
The equitable title is an interest in a property that is entitled to enjoyment and possession. It describes the right of an individual to obtain full ownership of a property even though legal title is held by another party.
An owner’s possession of a property comes by way of a title. In reference to real estate, there are two types of titles: The legal title is the standard view of property ownership. It’s fair and ownership is based on the deed. The deed clearly defines who owns the property and determines the legal owner. An owner can have as many legal titles as they want.
An equitable title is technically not a full ownership of a property. The member on equitable title is not allowed to independently stand in the shoes of full ownership. An equitable title refers to the benefits and use of a property even though they do not hold the legal title to it.
The party with equitable title has the right to obtain full ownership of a property, and they can benefit from it without having to put up the funds for the entire purchase price. The equitable title owner is not permitted to sell their rights to the property to another party.
There are three parts to an equitable title: The party with equitable title is entitled to the profits generated by the property, even if the legal title owner claims them. They may not claim the property itself unless the legal titleholder has neglected to pay certain bills, or if a deed has been signed over to each titleholder.
Having equitable title allows the environmentally detrimental practice of wastage to be avoided. This ensures that since an equitable title holder enjoys and possesses the home, they are also responsible for its upkeep and maintenance.
Legal Title Vs. Equitable Title: The Discrepancies
One of the most vital concepts of land ownership, and therefore in business transactions and finance is the distinction between legal title and equitable title. Distinctions between legal and equitable rights have been important enough to engender their own lines of case law and evolution to be discussed at a graduate school level. Merely reading through them is a dense experience that highlights much of the complexity of real estate law.
The distinctions between legal title and equitable title is important to many aspects of property use and operations. But even more importantly, the legal/equitable distinction underlies other legal principles that affect property, including priorities between liens, property being divisible in divorce, rights to possession and interests in rent monies to name a few. The transfer between legal and equitable title also directly affects the ability to issue or perfect a lien, entitlement to credits during a partition, the right to file bankruptcy, and the priority of bankruptcy discharge.
Legal title refers to the person or entity that has title to a property under the law of the state. An entity with legal title has the exclusive right to sell, give, or bequeath a property to another entity. Legal title refers to the technical ownership of a gift, property, etc. from one person to another.
Equitable title refers to the person or entity who has an interest in a property without necessarily holding legal title. When a bailor leases an apartment to a tenant, the tenant has equitable title to the property because he or she has a proprietary interest and benefits from the property. Even though the tenant has both exclusive use and exclusive possession of the property, the tenant cannot give away or bequeath the property to another person because the tenant does not hold legal title to the property.
The basic rule of legal title versus equitable title is that legal title will defeat equitable title. To a certain extent, the validity of an interest is determined by whether it is legal or equitable. In general terms, if there are competing interests in a property, the one that arises first is superior at law to those arising afterward. Only the person or entity holding legal title can divest legal title from the property to another person or entity, meaning that legal title will always trump equitable title.
Repercussions For Real Estate Deals
The distinction between legal and equitable title is particularly important at the time of sale, where financing is necessary to purchase the property. Although lenders can take the position that they only accept legal title at the time of financing, many lenders actually accept equitable title, especially in seller-financed deals. Likewise, when banks are clearing up title to a property before offering a foreclosure sale, they will often rely on equitable title claims to sell the property . Such a foreclosure sale will provide the purchaser with equitable title, but not legal title, until an action for specific performance is or has been completed. In litigation, the distinction is rarely made by parties or courts. Judge Winslow’s opinion in Baker v. Neff offers an insight into the way the distinction is sometimes made but is nevertheless dated. Baker v. Neff, 5 Wash. Terr. 118, 38 P. 1107 (1895). Today, the focus of the courts is usually on whether a party has an interest in the property and what that interest entails, rather than on whether the party holds legal or equitable title.
Hypothetical Scenarios And Illustrations
To further understand the impact of these two types of title, we can look at some real-world situations.
Estate Planning: A Clear Distinction
Randy Roadster owned a house before getting married. The deed showed him as the legal owner of the property. After he and his now-wife, Gabby, married, Randy took out a loan, using the house as collateral, and gave Gabby title to the house, which was now a residence. However, Randy’s name remained on the deed. Later, Randy defaulted on the loan and Gabby paid it off with funds from her savings account. Now, even though the debt was satisfied, the house still bore Randy’s name. When asked, Randy said that she was free to give the house to whoever she wanted to after he died, and that if she died first, he could do the same. Gabby said that she wanted to keep the house in the family for her niece, who might one day want to start a business and might need a place to do it.
In this case, Randy has legal title. Gabby has equitable title. They both have an interest in the house. However, since she paid off the debt, she has a lien against it, and she could sell the property at any time. She can act as if she is the owner, so long as it doesn’t cost Randy anything, and so long as it doesn’t benefit anyone else, like her niece, currently. Gabby can rent it out and collect rent payments without splitting them, or make decisions about the house’s sale without Randy’s consent or receiving his permission. However, she could not gift the property to anyone else, or sell it, modify the loan, or otherwise risk purchasing a new liability, as per the terms of the loan.
Parental Rights and Equitable Title
An example involving children or other dependents may help illustrating how these two different types of titles work.
Jim used to live in his parents’ home. Several years ago, he paid off the mortgage. Since then, his parents have been paying for the home as part of its value has increased. He has equity in the home, so it is not just his parents’ house anymore. After Jim and his wife had their first child about a year ago, they inherited some money (about $75K) and decided to build a new home. However, they could not find a willing buyer for the old house, despite having it on the market for more than three years. As a result, they pulled it from the market. Now, they have a child and live in a two-bedroom apartment. One day, Jim and his wife are at the hospital, where his father is being treated for an illness. Despite his best efforts, Jim is unable to locate his wife and she does not return his calls. He later learns that she is at the old house and has filed a notice of claim of lien.
In this case, Jim has legal title. His wife has equitable title. The home is their child’s only legal residence. Since Jim and his wife cannot locate each other, she has taken possession of the house and filed a lien. She is therefore entitled to have the tenants pay the rent to her and not Jim (though he retains ½ of it).
Jim’s parents will not have any rights to the home, and neither he nor his wife can sell it until the other can be located. He cannot gift it to his parents or anyone else.
Legal Implications And Guidance
Considerations and Advice related to Legal and Equitable Titles
In navigating the complexities of legal and equitable titles, it’s essential to be aware of the legal implications that may affect your rights to a property. When an individual possesses equitable title to property, but not legal title, they have greater risks in transferring their interest in that property. If the equitable owner seeks to sell their interest, the buyer may not have full legal rights to the benefits of the physical property itself, such as the minerals and profits derived from it. Legally, the equitable owner cannot transfer all rights to a buyer unless equitable titles are transferred first.
Someone who holds legal title could opt to give an equitable interest in the property through a transfer of property interest such as a deed or trust, a contract for the sale of the property interest or any other means. In this situation, the legal owner must balance the burden of being the named owner with the rights of the equitable owner.
Equitable owners are entitled to notice of legal proceedings affecting the property, so they have the right to intervene. Equitable owners also have the right to insist that the legal owner follow the terms of the transfer agreement.
One common example of an equitable title is that of a parent who transfers a house to their child while retaining the life estate in the home until their death. After that point, the child will have legal title to the property. Importantly, while the parent can refuse to sell the property if he or she has not yet passed away, nothing stops the child from borrowing money against the equity in the property now and repaying the loan using the property’s equity if they so choose.
If you are considering transferring or buying property with either a legal or equitable title, you should obtain legal counsel to ensure you fully understand the implications of such a title.
Conclusion: Deciphering The Title Mysteries
It should be clear from the foregoing that a full understanding of a title, and hence the ability of the owner of that title to convey property (or interests and rights in property), requires an understanding of any equitable interests and rights in the property. Title to real estate can be extremely confusing, particularly to non-lawyers.
It is possible, particularly in dealing with an estate that may have been in existence for many years, that there has been some action involving a conveyance of property that created an equitable interest in the property , giving rise to an obligation the property owner may not be aware of today. That is not to say that the confusion nor the obligations are insurmountable. More research and analysis will be required to fully determine the proper chain of title and whether any equitable interests impact the parties.
The reader is strongly suggested to engage competent legal counsel, whether it is my office or someone else’s, to review the property situation to see if that is the case.