What is legal title?
Understanding Legal vs Equitable Title in Real Estate
Legal title is profoundly more boring than its equitable counterpart. Where equitable title is all about abstract concepts like "possession" and "intention," legal title is the one that defines who the law recognizes as the owner of property. It’s title that doesn’t just give you a right to possess the land, it goes a step beyond to give you the right to convey it to another party. It’s recognized by the Court as the right to control the land, to transfer the land, and to pass down legal rights to your heirs. As we said, this is pretty boring stuff. But it’s of the utmost importance to the legal status of property title, because legal title trumps all. No matter how much you possess a land, no matter how strong your intentions, unless you have legal title, there is nothing you can do to convey or transfer that interest in property to another. This is why, when you purchase a home or any piece of property, you want a "legal" deed , not an "equitable" deed. But what you also really want are BOTH legal and equitable title. The reason for this is that legal title is generally an abstract concept based purely in the law. Legal title does regard the intent of the parties involved, nor does it recognize community property. It is the best form of title to hold if all you are interested in is legal recognition by the Court. The difference between legal and equitable title comes into play in transferring ownership from one party to another as part of a sale or gift. When the person giving the property away, the grantor, has both legal and equitable title, he or she can easily assign both to the new owner, known as the grantee. On the other hand, where the grantor only has legal title to the property, it can be much harder to assign. In this case, the grantee receives legal title but holds no power over the use and possession of the land until the grantor’s intention is made clear (through conveyance of both legal and equitable title, a gift of possession, or some other way of definitively communicating intent).
Equitable title explained
As previously touched upon, equitable title refers to the rights to ownership on the basis of principles of fairness rather than technicalities. When referring to a deed, such as a warranty deed, the individual receiving the deed has a legal title to the property, but not equitable title. Instead, the legal title determines the listed owner on paper, whereas the equitable title refers to the true owner of the property. Equitable title, therefore, is said to be held by the individuals with the equitable interest in the property, despite who is stated as the owner of the equitable title on paper. Even if the deed transferring interest in the property appears to have granted the entire interest in the property to a single individual, any person with an equitable interest in the property may assert their rights to equitable ownership in addition to relying on the legal title. The best way to understand equitable ownership is to compare it to a child who gives a friend the ownership of its toy, while also informing other friends that he or she still intends to play with the toy. The child gave the friend ownership of the toy on paper, just as a deed of trust transfers the legal interest in the property to the other party. However, similar to equitable ownership, the child who owns the toy still retains the right to play with his or her toy whenever desired, regardless of who has been given ownership on paper. The same principles apply to equitable ownership of land.
Legal vs equitable title
The key differences between legal and equitable title are as follows:
Ownership: Legal title is the formal ownership of the property where legal title holders have exclusive possession and interest. Equitable title, on the other hand, may only be an interest in the property’s value and right of possession. For example, A conveys Blackacre to B for life and then to C; A still retains the legal title, B has the equitable interest in Blackacre and C has the vested remainder.
Control Interest: The legal title holder has overall management and control of the property, whereas the equitable title holder only may have a residuary interest in the property and has no legal control over the land. In the previous example, C, with the vested remainder, only has a residuary interest and is therefore not guaranteed that the property will be there when the life estate ends. There may also be multiple equitable title holders. For example, a husband and wife may hold equitable title as tenants by the entirety leaving the heirs with no guarantee of her interest because Maryland still follows the common law presumption that if a husband conveys a one-half interest in the joint property to a third party without the wife’s consent, then the conveyance is operative to convey the one-half interest to the third party and equally divest the husband of one-half of both his and her rights in the property or allows the wife to enforce her wife’s curtesy and claim a life estate in one-third of the property.
Certificate of Title: At least in Maryland, upon the grant of equitable title, that title must be registered with the Maryland Land Office in order for the rights of equitable ownership to be protected. This means that equitable title will automatically prevail when competing with unrecorded legal title but equitable title will attach subject to the existing title recorded with the Maryland Land Office.
Tax Liens: Federal tax liens only attach to legal title holders unless there is a written agreement between the taxpayer and the holder of a legal title recognizing the equitable interest in the property. In the prior example, the only party that would suffer equitable title is B, the holder of the life estate.
Legal title and equitable title
The distinction between legal and equitable title is not only important to clarify who the rightful owner of property is, it is also important because often times buyers and sellers are unaware of the legal implications associated with each type of title. To determine whether a conflict between legal and equitable title exists, a buyer or seller must ask themselves several questions:
- How was the property acquired?
- What transactions make up the chain of title to the property?
- Who has been paid as the seller on the transactions associated with the chain of Title?
- What is the purpose and reason for transferring the property and are there any special instructions or requests from all parties involved?
Because conflicts can arise before the closing in the above situations, having an attorney to assist you in understanding the sequence of transactions, drafting all agreements and even provide title insurance against the risk that the seller will not convey legal title, can be very helpful. A real estate attorney specializes in the various methods of holding title, clarifying the sequence of transactions and helping to avoid future disputes. The attorney will usually hold legal title as a representative of the seller until closing.
Transferring legal and equitable title
As you might have guessed, we have legal title and equitable title, for real estate purchased and sold. Legal title is evidenced through the deed that transfers ownership of the property, and equitable title is a more difficult concept to define. Equitable title exists to vest a right of recover in equity if legal title is not conveyed. For example, by contract, you may assign equitable title to the contract purchaser prior to closing, but until they actually have legal title to the property at closing, you still have legal title and are considered the legal owner of the property. Thus, equitable title means something considerably different from legal title, and it has its place even though title is officially transferred in a closing.
When it comes to selling or purchasing real estate all parties should be familiar with the concepts of legal title and equitable title. For a buyer, they should have legal title to the house, so they can mortgage it, convey it, insure it, etc. But, until they have legal title, they might mortgage it. It is not until after all parties sign the paperwork and the deed is recorded in the county where the property is located that the buyer has legal title, but again until that happens, the buyer might well have equitable title and any possible remedies available to them in the event the seller backs out or otherwise fails or refuses to complete the transaction.
As mentioned above, the current convention in real estate closing is to transfer legal title through the use of a deed. We often talk about "conveying" title through conveyance as the act of transferring legal title. By default, if the deed is signed and delivered, and not revoked, legal title passes. Legal title automatically transfers on the deed, at least where no legal conditions exist on how title shall be conveyed. In the case of a sale, the owner of the land, the seller or vendor, conveys the legal title (and sometimes equitable title) to the buyer or vendee. The seller is the grantor and the buyer is the grantee. Through the closing where the seller delivers the deed conveying the property to the grantee through the payment, the buyer now has legal title to the property that had previously been conveyed. Title passes when ownership of the land passes, in accordance with law. If the closing does not happen, then legal title does not pass.
We say the deed "automatically" conveys legal title absolutely due to the fact it is signed and delivered and not revoked or rescinded. However, you may sometimes see conditions placed on a deed as to how title may be conveyed, so a deed not automatically passes legal title. For example, instead of a deed, one may use a quitclaim deed that conveys the grantor’s rights , title and interest in a property: assuming there is anything to convey. Thus, it is important to know what you are conveying on the deed because without legal title to convey, legal title cannot be transferred.
Legal title is normally vested in the person or persons who appear in the deed under the appropriate grantor and grantee clause, and it will generally not vest outside of those who are grantor and grantee. An exception to the general rules is tenancy by the entirety which will be discussed in greater detail in the section below. The all-important question is: what exactly is on the deed and who is actually conveying or receiving title? This is especially true if one spouse executes the deed alone and there are no legal conditions as to how title will be conveyed. As a note, we say the deed "automatically" conveys legal title to all persons listed on the deed, but this does not mean there are not other legal mechanisms – such as trusts and powers of attorney – that allow one person to convey title on behalf of another, whether in whole or in part.
In a closing, the seller conveys legal title to the purchaser through a deed as expressed above. The seller or seller’s agent conveys document (s) to the home buyer. Documents given to the buyer are signed and returned to the seller. The escrow officer records the deed to the property in the proper county and returns it with any other deed issued or executed.
The deed is usually conveyed to the buyer at closing, although it can be when a seller grants legal title to a property prior to closing. In addition, the deed is not the only document executed at closing or conveyed to the buyer. Many other documents are executed at closing: mortgages, notes, affidavits, covenants, waivers, etc. Many of these documents are signed by one party and retained by that party or the other. For example, inspection documents are typically signed by the buyer and provided to the seller. However, title closing documentation is likely to be signed by the seller and escrow officer at closing and provided to the buyer. All of these documents represent the transaction that has occurred through the closing and the agreement between the parties.
After the closing the escrow officer files all of the closing documents at the county sheriff’s office or recorder’s office, as appropriate. The deed is filed in the property’s file. The filing of the deed constitutes notice of the transaction that has occurred in the public records, and it is a customary practice in real estate transactions to file the deed. However, unless there are legal conditions on the deed as to how title may be conveyed, or a mistake in how title is conveyed, once the deed is delivered at closing legal title passes to the grantee.
Legal and equitable title in a lease agreement
As mentioned above, legal title and equitable title can apply to lease agreements. In fact, when real property is the subject of a lease, legal and equitable title are significant. Both parties to a lease (landlord and tenant) need to be aware of their rights that stem from the legal and equitable titles with respect to the real property that is leased.
Landlords have legal title to the real property being rented to tenants. This means the landlord has legal title to the land, and all improvements on that land. Landlords do not, however, have legal title to personal property items belonging to their tenants that are located inside the leased premises.
The biggest impact of legal title for a landlord leasing real property is that legal title gives the landlord, among other things, the right to possess and use the land, although the landlord must do so reasonably. The landlord also has the right to enter and inspect the property. The legal title also allows the landlord to sell or transfer the real property to another.
On the other hand, legal title does not always give a landlord the right of possession. A landlord who has retained possession of the leased premises cannot sell the real property. Legal title also does not allow the landlord to continue to occupy the leased premises after the lease expires.
Equitable title also gives landlords several rights with respect to the leased premises. Some of the rights associated with equitable title are: the right to demand rent from tenants, the right to collect rents from tenants and right to maintain the premises.
Tenants of real property have both legal and equitable title to the real property premises they are leasing. Since tenants have legal title to the leased premises, it gives them certain rights. Tenants have the right to exclude others from the premises and the right to give others permission to enter the premises.
While tenants do have legal title to the leased premises, the landlord usually has the right of possession over the premises during the time period covered by the lease. Tenants have the right to the use and benefit of the leased premises. In other words, tenants are entitled to rent the leased property, sublease the premises or assign the lease.
Since real property is considered a unique type of property, equitable title can be very important for tenants. This is true because even if a tenant has legal title to a leased property, they do not have the power to transfer commercial property without the consent of the landlord. The power to transfer the leased property is important because it allows tenants to enter into legally binding subleases and assignments of the lease.
Case studies: when legal and equitable titles collide
One of the most famous cases in the United States for legal versus equitable title is McCormick v. Drillings, 543 N.E. 2d 726 (1989). In that case, Thomas McCormick was a doctor who sought to purchase a house. He made the 285,000 dollar purchase with money that was illegally obtained from Medicare fraud. Upon learning of the criminal activity, the government sought to take the home and sell it. Tom McCormick, however, was found to be in possession of equitable title to the property. The state was found to have to compensate Mr. McCormick for the value of the home. It was decided that the compensation awarded would be equitable property instead of monetary, though the government may make subsequent complaints or motions to try and obtain another appropriate form of compensation.
In the case of Goodman v. Ladds, (2017) 114 O.R. (3d) 80 (Occ. Ct.), a real estate agent who owned the properties off of which he was receiving a commission was ordered to forfeit the property to the City of Toronto. Though the Court held that Goodman had legal title to the property and therefore would typically forfeit it, the fact that he violated the Real Estate and Business Brokers Act (the "REBBA") and repeatedly subverted the will of the City was what it found to be most pertinent. The merely technical nature of the issue was not sufficient enough to order that he keep the property, especially since the City had only been forced to issue orders to demolish some of the buildings. Had no action been taken, however, Goodman would have been forced to lose the property.
The case of Sandhar v. Nainar [2016] ONSC 901 (Can. Ont.), involved the partition of land between residential and commercial properties. In the case, two people purchased land together but partitioned it into a separate residential and commercial property. They both were given a fee simple estate in the land but did not specify or address ownership of the land in the partition. The part owners then got into a dispute over what to do with the land. The case went to trial and a judge ruled that the land would be split and sold so that neither owner was guessing about their individual worth in the land.
Conclusion: how to deal with both
In conclusion, understanding the nuances of legal title and equitable title is critical for real estate owners, buyers, sellers, and investors alike. Legal title provides the full rights to the land and has full dominion over it, but equitable title has the right to use and possession of the land. In certain cases, legal title can be subject to equitable title, and while legal title typically takes precedence, there are exceptions . Individuals with equitable title to a property may have remedies available to them such as suing the holder of legal title for the property or selling their equitable title to the land. To navigate the complexities of legal and equitable title, it is important to have guidance from a trusted real estate professional who can help you weigh the options and choose the best course of action.