Real Estate - The Transfer Of Title And Title Insurance
( Originally Published 1911 )
Two ways of transferring title.—Title to land may be transferred in one of two ways, either by conveyance, voluntary or involuntary, or by operation of law. The strictly legal classification is that land is transferred by operation of law only in case of descent without a will, and every other transfer of title is considered a transfer by purchase; but from the commercial side, all transfers by death, including those by descent and those by devise under a will, will be considered to be transfers by operation of law, and all other transfers of title to be transfers by conveyance.
Growth of modern right of transferring title.—Probably the natural genesis of the transfer of title between living persons was merely the taking of possession from the weaker by the stronger. As society developed and finally crystallized into the feudal system of the Middle Ages, land was held mainly by tenure, a personal relation between the subject and his over-lord, founded upon the necessity for mutual defense, and carrying i 4th it the obligation on the part of the lord to his tenant of protection, and on the part of the tenant to his lord of fealty and aid. The relation being thus personal, it was inappropriate that the tenant should be enabled to sever it and put in his place a person other than one selected by and acceptable to his overlord, so the holder of land had no say when he relinquished his holding as to who should be put in his place, and therefore no commercial transaction was possible with respect to his quitting his holding and giving it to another.
This method of land tenure finally led to a system of subinfeudation, i. e., the tenant who desired to part with his holding or some of it, unable to sever his own relation to his lord, would put another as tenant under him, and thus there would be a double relation, which might be sub-infeudated indefinitely. The king, as overlord of all, who was the original proprietor, had below him his tenants-in-chief, who, in their turn, had below them other tenants, and those tenants had tenants under them; and theoretically a system of sub-infeudation might be continued indefinitely. The evils of the system and the necessity for free land finally resulted in a statutory provision by which it was possible for a tenant to sell a holding and substitute another as tenant in his place. Upon this is founded the modern business of dealing in real estate.
Transfer by delivery of possession.—The first method of transferring land under the English system to which we must resort to understand our methods of transfer, was by the delivery of possession, the doing of some symbolic act and words of deliver, such as, "I put you in possession of this land." This` was a crude method of transferring title, and one, the evidences of which could very easily be lost and pass out of memory. If a man was in possession of property, and there was no one who remembered that he or his ancestors had not always been in possession, it became necessary to believe that he was rightfully in possession, and no one could contradict his title. This is the foundation of our present title by limitation or adverse possession.
Genesis of transfer by deed.—Disputes necessarily arose in a system founded on delivery by possession; frauds were perpetrated; men got into possession wrongfully, and held possession forcibly; the courts and over-lords were continually settling disputes upon questions of fact. Finally an expedient was resorted to, as conveyances became more frequent and more important, of making a written record of the fact of transfer; and a statute was enacted requiring that there should be such a record. This was known as the Statute of Frauds, which is intended to guard against the frauds and uncertainties incident to the former method of transfer, and is the genesis of the modern instrument of conveyance, known as a deed.
Definition of a deed.—In law every formal instrument under seal is a deed, whether it be a conveyance of land or a conveyance of personalty or an instrument declaring trusts, therefore the use in the real estate business of the word "deed" as meaning the instrument of conveyance of land is too inclusive. On the other hand, in New York State and many other states in the Union, a conveyance of land need not be under seal, so 'the word "conveyance" is exactly inclusive of a conveyance of land, because the conveyance may be under seal, in which case it is a deed; or it may not be under seal, and still be effectual. However, in this discussion of the subject the word "deed" will be used, as in common parlance, to mean a conveyance of real property effectual to transfer title, whether that instrument be under seal or not.
Conveyances absolute and upon security.—Conveyances are of two kinds, absolute and upon security. Absolute conveyances are those which by operation of the instrument immediately transfer the title from the grantor to the grantee. Conveyances upon security, known in some states as mortgages and in other states as deeds of trust, are conveyances in form as if the title were conveyed immediately, but having added to them the condition that the grantor shall remain in possession and retain the ownership of property until he default in payment or performance of the obligation which the instrument secures ; and usually the loss of title is not immediately upon the default, but must be followed by procedure at law or sale for the purpose of collecting the amount of the obligation which the instrument secures.
Necessary elements of a deed.—The statutory provisions which relate to a conveyance or deed of land require only that the instrument shall be in writing, and that it shall be subscribed and in some states, sealed or witnessed. All the rest with relation to the deed or conveyance is formality, or adds incidents, but if a deed be understandable and the subject matter capable of identification, and it be executed in proper form, it will transfer title. It need not express consideration, as a contract must. The necessity that the instrument be in writing is patent. The rights under a deed are permanent : they will last as long as the property which is transferred remains capable of identification. In this country titles are now traced through deeds of conveyance which have been upon the records 100 and 150 years. In England they take their titles through conveyances very much older. The persons concerned in a conveyance of land are not only the immediate parties, but all persons who may thereafter be interested in the land, which is another reason why there should be a written testimony to the transfer.
The subscription to a deed must contain the same elements as the subscription to a contract. It is usual, and where the grantor can write, practically requisite that he shall write his name; but if the grantor cannot write or is physically incapable, he may make any mark at the end of the instrument which will testify to the fact that he executed it. The instrument thus subscribed is efficient between the parties, but the law has thrown around it another safeguard in order that it shall be efficient as against third persons : the instrument must be either witnessed and properly acknowledged, or proved. The witnessing of an instrument is the writing of the name of a person who was present at the execution of the instrument opposite or near the signature of the subscriber. The instrument which bears a subscription and is attested by a witness is efficient not only between the parties, but also as against third per-sons claiming rights in the land affected. If a person get a deed which is not witnessed or acknowledged, and go to court and sue for possession, the instrument being good as between him and the seller, the court will award him the possession; but he might find difficulty in sustaining that instrument against a third person claiming lien against the property or a subsequent grant from the seller, without notice.
When title passes.—Title passes only by delivery of the instrument. So long as the instrument has not been voluntarily surrendered by the transferrer to the person to whom it is to be transferred, title does not pass. If the transferee gets into possession of the deed by any unconscionable means, if he steals it or gets it by fraud, the transfer may be set aside. From the instant of delivery of the instrument, there is transfer, and an end of all rights of the transferrer which the instrument is efficient to carry; and all rights of the transferee which the instrument is efficient to carry, begin.
Recording of conveyances.—There is not necessarily from the fact of the passing of the instrument, any notice to the public of the transfer of title. If property be improved and occupied, the fact that the occupant changes may operate, and in law does operate, to give notice of the fact of transfer, the principle of law being that all the world is required to take notice of the rights of the occupant. But where property is not actually occupied by the owner or where it is vacant, there is not in the mere delivery between private persons any element of notice to the world of the fact of transfer, and a seller having delivered a valid deed of conveyance to a purchaser, might turn round and take money from another person, delivering to him another instrument, and leave the two to fight out their rights. In order to avoid that possibility there has been devised the system of public record of conveyance under which by public authority a safe place is provided where the testimony of conveyances may be recorded, so that all persons may resort to the public record to ascertain that a transfer has taken place. The provisions of law now result in the presumption that each person dealing with property has notice, which the law designates as "constructive notice," of all matters which are spread upon the records concerning that property. Constructive notice is no better than actual notice, but it is an efficient substitute. If A transfer property to B for a valuable consideration, B thereupon becomes entitled to the ownership of the property. If thereafter A transfer the same property to C, but C actually knows of the conveyance to B, it is manifestly improper that C should be able to take the property from B. But if B fails to record his instrument, and C becomes a purchaser for value of the property, without notice, either actual or constructive of B's prior purchase, then, if C record his instrument before B offers his instrument for record, C, being an innocent purchaser for value, becomes en-titled to the property, as against B who has not recorded his instrument or offered it for record. But if B buys property and records his instrument, and then C purchase the same property, C is charged with constructively knowing of B's recorded instrument, whether he actually goes to look at the record or not. That is the principle which makes the constructive notice of record effectual.
Instruments for record must be acknowledged or proved.—In order that an instrument may be accepted for record, it is not only necessary that it shall be subscribed and witnessed, but that the public official who spreads it upon the record may know of its authenticity, it must be acknowledged or proved. It is manifestly impossible that public officials shall know the signatures of all grantors, but it is theoretically possible that they shall be familiar with the handwriting and authority of a limited number of public officials who are authorized to testify to the fact that the grantor has acknowledged that he executed the instrument, or to whom the instrument has been proved by a subscribing witness.
The acknowledgment of an instrument is the admission by the person who executed it to a public official charged with authority to take such acknowledgments, that the grantor executed it.
Prefixed to the certificate of acknowledgment for purpose of convenience, not as a necessary element of it, is usually a statement of the place in which the acknowledgment was made. That is convenient, because the officers authorized to take acknowledgments are officers whose jurisdiction is limited territorially. With relation to some of these officials, consuls, mayors of cities, commissioners of states residing in other states, it is often necessary by statute that they shall certify that the acknowledgment was taken within the territorial limits of their jurisdiction. If there be no statutory requirement in that regard with respect to the official taking the acknowledgment, there is no necessity for a statement of the place in which it is taken, although it is convenient. The presumption of law is that a public official acts within the limits of his authority, unless it be shown that he has acted beyond those limits.
Officials who are authorized to take acknowledgments are: notaries public, commissioners of deeds, justices of the peace, judges of courts of record, mayors of cities, ambassadors and ministers residing abroad, consuls, vice-consuls, consular agents and commissioners of deeds appointed by the governors of states to take acknowledgments in other states. In order that an instrument may be recorded in any state, when it was acknowledged before an official of another state, it is usually necessary that there shall be added to the acknowledgment a certificate by the clerk of a court of the county or city in which the acknowledging officer resides or acts to the effect that the acknowledging official is authorized to take acknowledgments of instruments intended to be recorded in the state in which he resides, and that the certifying officer knows his signature, and that the signature is genuine.
It may not be convenient or possible for the person who has subscribed to the instrument to go before an official authorized to take acknowledgments. If, however, the subscribing witness go before such an official and swear that he is acquainted with the grantor and knows him to be the person described in and who executed the instrument, that he was present and saw him execute it, and that he thereupon subscribed his name as subscribing witness, that is proof of a deed or instrument, and is the exact equivalent of a personal acknowledgment by the grantor.
A deed may be acknowledged or proved, and is as valid in one case as the other, and then may be recorded. The official who takes a proof must be one who would be entitled to take an acknowledgment, and his signature must be authenticated or certified in the same manner or to the same extent as if it were the signature to a direct acknowledgment.
It is a penal offense in many states for a notary to take an acknowledgment unless he knows the person who appears before him to be the person who is described in and who executed the instrument. There would be' no safeguard to conveyances, if a man on the street could walk into an office and say, "I am John Smith. I acknowledge that I executed this instrument." Many acknowledgments are taken that way and lead to serious frauds. If a person be credibly introduced to the notary by some one he knows, and in whom he has confidence, he may certify that he knows the person thus introduced. It is careless work, but it may excuse the notary. Careful notaries keep a register showing the acknowledgments which they take and the persons who bring in the subscribers; and there have been litigations in which these memoranda have proved very useful.
Delivery must be by competent person.—Delivery of an instrument must be by a person competent to make delivery. It is not only necessary that the grantor shall be competent at the time he signs the instrument, but it is necessary that he shall remain competent until the instrument is delivered. An incompetent person cannot make delivery of a deed. A dead man cannot deliver a deed. If a man execute an instrument now and retain possession of it and sometime in the future become a lunatic, and while thus incompetent make delivery of the instrument, it may be set aside. If an instrument be found recorded after the death of the grantor, the question will always be asked and usually be carefully investigated, whether the instrument was actually delivered in the lifetime of the grantor.
Transfer of property by will.—If it be intended to make a voluntary transfer by operation of law in such manner that the owner shall retain all dominion over the property until his death, but that then it shall pass to persons who are designated, it is competent that it be transferred by will. There is required not only the voluntary act of the conveyor in the execution of the will, but also the operation of law upon it. By reason of the death of the testator the title is carried forward by a legal operation to the beneficiary designated in the will. Persons who take under the operation of wills are designated as "devisees." They are not, in contemplation of law, purchasers for value any more than are the heirs of the testator, so that the rights of an heir or devisee would be barred by a deed to a purchaser for value which had been made by the testator or decedent in his lifetime, even though the instrument were not recorded. The principle of constructive notice can be invoked only among purchasers who have parted with value.
In some states, as in the State of New York, it is sufficient if a will be subscribed by the testator in the presence of two witnesses who in his presence and at his request sign as subscribing witnesses. In other states three witnesses are required. The transfer of title must be executed with the formalities required by the law of the state in which the land is situated, not with the formalities of the law of the state of the domicile of the testator.
Inquiry into public records—how directed.—An instrument having been properly acknowledged or proved, it may be placed upon the public records and it then operates as constructive notice to all persons dealing with the real property. The presumption of law is that a person who is about to enter in any dealing with respect to real estate knows all that is spread upon the public records with relation to past dealings with or the title to the property with which he is concerned. In order that one may get full information upon the subject of ownership of property, the inquiry into the public record should be directed, first, towards ascertaining the history of the property under consideration; and, second, towards ascertaining whether there be any defects in or encumbrances upon the chain of title disclosed by the history or abstract of title.
Reasons for employing counsel.—The law of real property is a technical and complicated set of rules, an important part of general jurisprudence, and to examine a title one must have some familiarity with the principles of law applicable to the subject, considerable experience with the effect of the record and ability to handle and read the indexes to the record. The ordinary layman who is dealing with property as a commercial proposition, has not the time nor the technical knowledge to determine for himself the subject of the inquiry. For that reason the practice has become universal of employing counsel or conveyancers to make inquiries into the title of the property about to be dealt with, attorneys or abstractors who make a specialty of this line of work being known as conveyancers.
Responsibility of examiner of title.—The first thing that must be noted in relation to this employment is the degree of responsibility placed upon the professional examiner of titles. Every professional employment implies on the part of the person thus employed, first, a representation that he is competent to deal with or examine into the subject ; and, second, that he will use his knowledge in accordance with the rules of the art or science in which he is employed and with due diligence; but no professional employe guarantees the result of the employment. A physician will agree to give competent skill and to employ it according to the rules of his science. He will not and cannot undertake to guarantee the result of his treatment. The professional conveyancer undertakes to examine a title, giving to it expert professional knowledge according to the rules of the art and science applicable, and to give his opinion upon the result. The man who examines a title upon the record does not know whether the instrument which he is reading is a copy of an authentic instrument. He is entitled to presume, from the fact that he finds the instrument on record, that it is a copy of an authentic instrument and not a forgery. He presumes that the person who made it was competent, i. e., mentally fit to understand the meaning and result of his act. He is entitled, when he examines a will and finds that citations have been served upon certain persons as the heirs-at-law of the decedent who are disclosed by a verified petition, to assume that those were the only persons. He is entitled to believe in the authenticity and correctness of the record and of the facts shown of record, and if, believing those facts, he draws an erroneous conclusion of fact, he is excused and is not liable to his employer, who must carry the burden and risk of such error. If a conveyancer has given to his employer an opinion that a title is good and marketable, but it should turn out that a deed in the chain is a forgery, that there is an undisclosed heir—who according to ordinary rules would not have been discovered—or any other casualty, the attorney is not liable and the loss falls upon the employer.
There is not only a conclusion of fact to be drawn upon each link in the chain of title, but there is also a conclusion of law. The attorney undertakes in this regard also to apply ordinary professional skill; and if, applying ordinary professional skill, he is mistaken in drawing a conclusion of law, he is again excused: he is not liable to his client, and the loss again falls upon his employer.
Origin of system of title insurance.—The greater number of defects in title develop a long time, some-times generations, after the erroneous conclusion has been drawn. Very often a person who believes he owns a piece of property occupies it peaceably for years, and when he sells it, finds that the title is defective. The attorney then examining it may examine with greater skill or have more reliable sources of information than the one who examined the title before. That long interval of time adds another risk, and by the time an error or mistake in title has been discovered the attorney who made the search may not be living. If he was responsible when employed, he may have become irresponsible. He may have died and left no estate. There are a hundred things that may happen to prevent an owner being paid for his loss. Realizing these risks, American business men invented the system of title insurance, by which a corporation formed for the purpose of, and authorized to guarantee the result of the examination of title, assumes not only the professional risk but all the rest of the risk of the validity of title which lies over and beyond the professional risk, and carries it for a consideration or premium. It is a purely American system and is possible only in those places where public records are as complete as in the United States. It is a development of the American system of the division of the risk over the entire community, which we know as our general insurance system. A title insurance company makes the examination with the best professional skill it can command and then deals with the public by making, first, a preliminary report of the condition of the title, which is really a statement of the terms upon which the risk will be. assumed ; and, second, if those terms are accepted, it issues its policy in a definite form.
Report of title.—When dealing with a title insurance company, one should always insist before closing the transaction upon having a written report of the title. A policy of title insurance is not issued until after the transaction, the result of which is to be insured has been consummated, therefore something preliminary is required both as a guide in title closing and to serve as a binder. Every part of the report should be clearly understood before going into a title closing. The report may not necessarily show that the seller has such a clear and unencumbered title as he has contracted to sell. It will show the state of the title as it is at the time of the examination, with the matters remaining to be disposed of in order that the title may be merchantable according to the contract or transaction which is in contemplation, all set out so that they may be disposed of.
Having made the title adjustments and having recorded the instruments which would transfer the title in the manner intended, and disposed of the encumbrances and defects in the manner which was pointed out, the company issues its guarantee according to its promise in a clear and understandable form. A policy of title insurance should always be carefully examined to see whether it insures the title in the manner in which it was promised or understood that it would be insured, and that it contains no exceptions from the insurance which were not assented to before the transaction closed.
Title insurance policy.—The policy issued by a title insurance company usually consists of four parts: First, the agreement of insurance ; second, a schedule setting forth full details of the subject-matter of the insurance; third, a schedule of the exceptions or limitations of the subject-matters of insurance ; and, fourth, the conditions governing the relations between the in-surer and the policy holder.
Agreement of insurance.—The charges of title insurance companies are fixed, like every other insurance premium, upon a rate per cent commensurate with the subject of insurance, or with the limitations upon the loss. A title insurance company will require that a policy be taken for at least the fair value of the property, or for the amount paid for the property in purchasing. There is no objection to the insured taking as much extra insurance beyond the present value or the cost of the property as he is willing to pay for; and sometimes it is quite appropriate that this be done. A person may contemplate improving property and making it more valuable, and may desire, in case of loss, that he should be fully compensated.
In consideration of the premium the company guarantees to the insured and to his heirs and devisees—but not to the assigns of the insured—that it will insure them against all loss or damage, not exceeding some specified amount, which the insured shall sustain by reason of any defect in the title affecting the premises described in the schedule annexed. The policy is dated, and goes as of its date. The date, in order to protect the insured, should be on or after the time of closing of the transaction, the result of which is to be insured.
If there be a loss upon a title insurance policy, the amount to be paid upon the policy is not more than will indemnify or make whole the loss, not necessarily the whole amount of the policy, but not more than the whole amount, unless the company should call for a conveyance to it of such title as the insured may have, in which case it pays for the property its full value, as if the title were as good as insured.
The premium is a level, single premium, paid once, and once only. It does not differ with relation to the kind of risk assumed. It varies only with the amount of the risk. Titles which present troublesome and hazardous questions of law or troublesome questions of fact, if insured, should be insured at the same rate as easy and clear titles.
A policy of title insurance is issued under seal and time does not begin to run against it until a loss has been incurred, therefore a policy of title insurance continues enforceable against the insurer not only for the full period of limitation after it is issued, but for a similar period after the time loss was incurred.
Subject-matter of insurance.—A title insurance policy sets forth the subject-matter of insurance in a schedule in which is stated, first, the character of the ownership or lien which is insured. That interest may be a fee simple or a mortgagee's interest. Then follows, for purposes of identification, a statement of the deed or instrument by which the interest of the insured was acquired, and then a description of the real property affected. That real property should be described with common certainty so that the insured can understand the description. It is a mistake to accept a policy from a title insurance company which does not describe the property so that it can be identified upon a map or upon the ground in some clear and unmistakable manner. The policy of title insurance covers all that is real property upon the land, but to those things that are essentially personalty it does not apply.
Exceptions and limitations upon subject-matter of insurance.—The encumbrances subject to which the property has been accepted should be set forth in a title policy in a clear and understandable manner. Very often the title insurance company will require, before it closes title, that the intended exceptions to be put in the policy should be assented to in writing, before it will assume the responsibility of closing the transaction. All the matters that affect the property, as shown by survey, should be set forth; or if no survey has been furnished upon which the company is willing to rely, it will set forth that it does not insure against such facts as an accurate survey would show.
Conditions of policy.—The first and most important condition of a policy of title insurance is that the company will defend at its own expense all actions or proceedings founded on a claim of title or encumbrance prior in date to the issue of policy and insured against. A policy of title insurance is not only an insurance of indemnity against actual loss, but it is also an insurance against being harassed by litigation respecting the title.
A policy of title insurance insures also that the title is not only good and can be defended against attack, but that it is marketable, that is, that a purchaser can be compelled to take it. All such proceedings are con-ducted and defended by a title insurance company under its direction and at its expense, both as to counsel fee and risk of costs.
A policy of title insurance usually provides, unless it be a policy issued to a mortgagee, that it is not transferable. In the nature of things it is not consistent that a policy issued to the owner of a fee title should be transferred. The agreement of a title insurance company is to indemnify against loss, and that the title is marketable. If the insured parts with his property and receives compensation for thus parting with it which is satisfactory to him, then the title insurance company has performed that part of the contract under which the policy holder was assured that he had a marketable title; and to permit a policy upon that branch of insurance to remain open and a continuous obligation would be to multiply the risk, so that each subsequent policy holder would have a new and fresh claim for insurance indemnity.
But when the insured has parted with his property, all the risk of the insurer has not ended. When a piece of property is sold, it is customary to give a deed containing covenants, and the seller may be held liable upon these covenants. A policy of title insurance provides, in addition to indemnification with regard to the marketability of title, that even if a person has parted with property, in case he should be held upon any covenant in the deed, that he will be indemnified if there be any loss for that reason. Because that indemnity re-mains and continues to the original policy holder, it is again inappropriate that a policy of title insurance should be transferable.
A mortgage policy is usually expressly transferable with assent of the company, so long as the mortgage interest which is insured remains, because when a mortgage is transferred all the collateral ought to go with it, and a policy of title insurance is appropriately col-lateral that goes with a mortgage. There are usually no covenants except as to present state of facts in an assignment of mortgage.
The policy of title insurance necessarily stipulates that any untrue statement made by the applicant or policy holder leading the insurer into the issuing of a policy will vitiate the policy.
Although a limit is placed upon the amount of insurance, a title insurance company may have to pay out a great deal more than the cost of the policy in order to properly adjust its loss. That is because of a pro-vision of the policy that the insurer shall have the option, if there be a loss, of either paying the loss or taking over the property; and if the company calls upon the insured to turn over the property, it must pay its full value, not the amount limited by the policy. Very often when a loss happens on a policy of insurance, it is not a total loss. There may be considerable loss, but if the title be taken, and proper proceedings conducted, it may be possible to minimize the loss. In such cases the title insurance company will call upon the policy holder to deliver to it the salvage, and will pay for the property as much as it is fairly worth.
If there should be a total loss, the amount of payment would be limited by the face of the policy. In the case of a policy upon a piece of property which came through a deed which proved to be an absolute forgery, the policy holder would have nothing to give, and the company would have to pay the face of the policy, provided the property was worth that much; and its loss would be limited by the amount of the policy. But if it should turn out that only a part of the title was defective, a title insurance company might very well call on the policy holder to turn over the property at the sales price or at its fair value, which might be a considerable sum above the face of the policy. Usually defects in title can be cleared up by the use of time and skill.
Whenever a company settles a claim, it is entitled to be considered as having acquired every right which the policy holder has against persons who are liable to him by reason of the loss. If a company is held because a mortgage or tax has not been paid, and the insured has a full covenant and warranty deed, it is entitled after paying the policy holder his loss, to sue the man who made the full covenant and warranty deed so that it may recoup the loss. This is known as subrogation.
The policy of title insurance expressly provides that it does not cover "defects and encumbrances arising after the date of the policy." Everything that happens after that date is in the control of the policy holder.
Use of title policy.—A title policy should be used whenever the property insured is being sold or any agreement is being made with respect to it. Care should be taken to make the contract or agreement with respect to the title as it is insured, so that if there be any defect in title or marketability, the insured can fall back on the insurer. In order to be certain of that, it is customary to have the title insurance company prepare the contract or agreement with relation to the property; and then there cannot be any question as to who is responsible.