What is a Legal Title?
A legal title to real property vests in the person or entity who has legal title to and is registered as the owner of real property. Legal title is created through the acquisition of legal right of ownership as between the parties to a transaction that accomplishes the transfer of ownership. Legal title is accompanied by the right to secure possession of the property and to use and convey it. The owner of a legal title must also pay the general obligations pertaining to the property such as property taxes and HOA dues. Legal title is effective against the world at large despite any occupancy by others or right held by third parties. Legal title is the most comprehensive right to real property that one may have.
What is an Equitable Title?
An equitable title is not uncommon in real estate, and in fact proves beneficial in the right context. In the most basic definition, an equitable title involves a right to full ownership, but without providing full ownership to the property until certain conditions are met. Equitable title is often the result of circumstances such as sale, but without transferring the deed to the property.
Equitable title is also largely the most important type of title for real estate held in a trust. A trust involves a legal entity that holds property for the benefit of a beneficiary. If a trust is properly set up, the legal title of the real estate belongs to the trust while the equitable rights belong to the beneficiary.
The practice of equitable title involves an agreement between partied that the holder of legal title will act in the stead of the other person or entity. Generally, an agreement of this nature will eventually transfer the legal title to another party, such as in the case of equitable title to land contracts. This is where a third party buys a property and sells it to another party. In this scenario, even with the passing of rights to the new party, the original seller retains the legal title to the property.
Equitable title is also common in the case of foreclosure. Foreclosure provides decay of title, meaning that the purchaser acquires the legal title, but the seller retains equitable title on that property.
Distinctions Between Equitable and Legal Titles
Here are some primary distinctions between both types of title:
Transfer Control
Legal titles carry the ownership rights. It represents the ownership of real estate within its ownership boundaries. On the other hand, an equitable title represents a person’s right to use or obtain the full ownership of the property after a certain condition is fulfilled. For example, legally owning a property means you have a deed that states your name. On the other hand, equitable ownership is basically the same as being a beneficiary in a trust. In summary, a legal title is the real owner, while an equitable title is the beneficiary.
Transfer of Interest
Another difference between the two types of titles is that the transfer of an equitable title does not require consideration. The price paid for the property is deposited into trust, which is managed by a third party called the trustee. The seller and a buyer choose whether or not they want this kind of property ownership. The buyer is the beneficiary of the trust. When the property is transferred to the beneficiary, the price of the property will be handed over to the seller. When it comes to transferring legal ownership of property, the deal is generally closed when the property is sold after valuable consideration is exchanged.
Value of Transfer
The equitable title isn’t necessarily valuable to a creditor (lender), and is non-transferable. Neither can it be transferred voluntarily or under normal conditions of a court order. To make it involuntary, the creditor can forcefully make the transfer. On the contrary, a legal title is valuable for creditors. If a creditor owes money to someone, the creditor can take possession of the property and exclude the owner from using the property. Once the property is sold, the creditor takes their share after paying the due amount to the owner.
Legal Consequences of Holding an Equitable Title
Holding equitable title comes with both benefits and risks. It offers certain protections to the holder in circumstances where a legal title is required but is not available. For instance, the holder of equitable title may have the right to protect their equitable interest with a lien on the property or by recording a lis pendens against a potential third-party claim. In some cases, the holder may be able to sue for specific performance in order to force the transfer of the legal title. To prevail, the equitable title holder must establish that they have satisfied the requisite constructive trust factors.
There are certain risks in holding equitable title as well. Perhaps the most notable is the risk that an equitable title holder will not have priority over an innocent third-party purchaser. An equitable title holder who does not make this known to a purchaser runs the risk of losing their claim to legal title as the result of a bona fide purchaser defense. Under these circumstances, the legal title holder would be entitled to reimbursement for the amount that they willingly paid for that interest.
Role of Titles in Trusts and Estates
When considering equitable and legal titles, there are two situations where equitable and legal title are important. The first is the distribution of property. The second is title after death-whether death happened before or after the creation of the trust.
Beneficiaries of an estate will usually deal with equitable and legal title to property after a decedent dies. Legal title is put into the name of the executor or personal representative. Any distributions from the estate will be equitable (the beneficial interest to someone through a beneficiary designation in a client’s will or a deed). Legal title is moot after the death of the person who owned the property.
Note that after death , legal title and equitable title are almost always separated. For example, if the individual died with a will, legal title was in the name of the deceased and resided with the court, and equitable title goes to the beneficiaries named in the will. If the individual had an estate plan in the form of a trust, legal title is in the name of the trustee (not the decedent who created the trust), and equitable title goes to the beneficiaries named in the trust.
Case Studies – Equitable vs Legal Titles in Practice
1. Equitable vs Legal Title in Real Estate Transactions
One of the most common contexts for the distinction between equitable and legal title is in real estate transactions. For example, in the case of a property purchase where the buyer has yet to secure a mortgage, the buyer may have equitable title while the seller retains legal title (and thus, the state’s records). For such scenarios, it’s important to know that equitable title holders enjoy certain privileges. Much like in our fictitious court case above, they have a right to possess or occupy the property, to improve upon the property, and to obtain profits from its use – that is, they can rent or lease the property. Once the buyer has secured a mortgage and the seller has been paid an agreed-upon sum, then the equitable title would graduate to legal title. Equitable title can also be used as a remedy in property law. In Braun v. Goldie, the defendants purchased a restaurant business. They then later conveyed the property title back to the previous owners but retained an option to acquire title to the property in the event that negotiations with the planned purchaser failed. The land was purchased by a new owner and, upon being notified of the option, the new property-owner refused to transfer possession. Justice Sloan in the Supreme Court of Canada held that "the court’s power to award specific performance is not dependent on actual title; an equitable title to an agreement to convey is enough". It was not sufficient for the court to issue a certificate of foreclosure; the defendant could not recover under the original conveyance. The defendants were required to fully perform the terms of the original agreement, including the conveyance of the land.
2. Equitable vs Legal Title for Business Disputes
Another context for the distinction between equitable and legal title can be for the distribution of business assets. For example, the Ontario Superior Court of Justice in Kordana v. Kordana dealt with a conflict over two brothers’ "equal and concurrent equitable interests" in a family business. The court enforced a very specific contract between the two that acknowledged the simultaneous ownership over the business by both parties. Such a contract resulted in a unique set of circumstances where neither brother truly had primary ownership over the business. As the brothers had "equal and concurrent equitable interests", they both held equal rights to manage and control their father-in-law’s trucking business. They were "equitable co-owners" where they both possessed "concurrent rights of management and control of the business" but may not necessarily have any defined responsibilities. Given their success thus far, it was then agreed that neither brother would have any renegotiation of the contract. The court emphasized the prospect that any substantive interference with the contract would "entirely upset the equality between the parties" and result in "inordinate prejudice" to one party – the Suffix Brothers were found to be "equal partners" and any interference would "be unjust in equity". Equal shares in value did not mean that equal shares existed in the operation of the business. The Suffix Brothers were found to be co-owners of equal value: each of them received one half of the actual value of the business, paid by the Suffix Brothers to themselves as partners.
Importance of Understanding Title Distinctions
Understanding the differences between equitable and legal title is essential for a wide array of property-related professionals, including buyers, sellers, real estate agents, brokers, and attorneys. For example, most buyers and sellers would be unable to navigate the complexities of a 1031 exchange without a firm grasp of the distinction. Familiarity with the terminology can even streamline the closing process.
Buyers, sellers and investors must consider how legal versus equitable title will affect their future plans when buying and selling property. Sellers need to know whether a property interest or stake is subject to limitations given the terms of a contract. Perhaps most importantly, understanding the difference can help sellers, buyers, brokers, and investors avoid committing fraud and finding themselves on the wrong end of litigation . For example, a closing disclosure excellently completed with all the expected disclosures can lead to fraud if the underlying party did not have legal title or was otherwise not free to sell a property.
Failure to recognize the difference between equitable title and legal title can lead to significant consequences in real estate law. Numerous court cases have been decided based on improper or incorrect assertions regarding legal title. Thankfully, many judges and juries recognize the potential for innocent mistakes. Even so, relying on myth, hearsay, or powerful rhetoric can be a risky maneuver that would have best been avoided.
It is easy to understand the importance of equitable versus legal title once you are familiar with the differences. The terms are not just legal jargon with little practical relevance but terms with real impacts — and potential legal repercussions. This is especially true for individuals and entities in the midst of a complicated real estate transaction.
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