Title Examination in California: Vesting of Title

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July 17, 2018

1. Estates and Interests
The estate or interest defines the relationship between the owner and the land. The manner in which the owner holds title (covered in a later section) defines the relationship between the owner and co-owners.

Unless otherwise advised, the title searcher usually presents the title examiner with a search package that covers a fee interest. Most commonly, title insurance policies cover a fee interest. If fee title is covered, the record is not searched to determine who currently holds title or interest to each encumbrance. For example, an encumbering easement interest or CC&R interest are shown as exceptions but the current ownership of such interests is not searched unless specifically requested and paid for. To facilitate the closing of transactions, certain matters affecting trust deeds (subject to frequent refinancing or pay-off upon sale) are customarily shown; for example: the assignment or collateral assignment of the beneficial interest, or the substitution of trustee.

1.1. Fee Title Presumed
In the past, a fee estate would be called "fee simple absolute" if there were no conditions affected the title such as a right of reentry or possibility of reverter. Such conditions rendered the estate "fee simple determinable". Estates that were classified as fee simple determinable at common law (including the possibility of reverter, right of reentry, right of revocation, etc.) have been abolished by Civ. Code 885.020 and essentially reclassified as “powers of termination” under Civ. Code 885.010.

Fee simple title is presumed by a grant of real property unless it appears from the grant that a lesser estate was intended (Civ. Code 1105). Where the language of the deed is ambiguous, the courts may turn to extrinsic evidence to determine the intent of the parties.

In City of Manhattan Beach v. Superior Court, 13 Cal 4th 232; 52 Cal. Rptr. 2d 82; 914 P. 2d 160 (1996), two hobbyist "heir hunters” together with 80 others, claimed that a strip of abandoned railroad sold in 1986 by Santa Fe Railroad to the City of Manhattan Beach had been an easement, not a fee. The California Supreme Court, noting that the terms of the conveyance in question were ambiguous, resorted to extrinsic evidence to determine that the grantor intended to transfer fee title.

1.2. Less Than Fee
If any estate less than a fee is to be insured under a policy of title insurance, the write up in the title report may include reference to the instrument that created the estate or interest.

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When an easement interest is covered, the document may be referred to in Schedule A, or it may be referred to in the description and incorporated into Schedule A by reference to the legal description.

1.3. Leasehold Estate
A lease has dual characteristics – it is both a conveyance of an estate in real property for a specified period of time and a contract between the parties to the lease. As such, two legal relationships are created – privity of the estate (resulting from the landlord/tenant real property aspect) and privity of contract (derived from the contractual nature of the lease). A lease generally provides the tenant with the exclusive rights of use and possession of the property subject to the terms of the lease and the right to reversion in the landlord. Matters appurtenant to or necessary for the beneficial use and enjoyment of the premises are presumed to pass with the lease unless excepted from the lease or reserved by the landlord.

A leasehold interest may be recorded. Alternatively, a memorandum of lease may be recorded. While a recorded lease or memorandum of lease may be executed solely by the landlord, recordation of a lease that is not executed by the landlord may subject the recording party to a claim of slander of title. Recordation of a lease or memorandum of lease imparts constructive notice of the lease to subsequent parties dealing with the real property such as subsequent purchasers or encumbrancers.

A title examiner considers matters affecting the fee title prior to the date of commencement, but usually considers only matters that affect the lessee’s interest after that date. The careful title examiner will read and consider all of the lease language in light of its affect on title. It is proper to show a general exception because contract provisions of the lease are not covered by title insurance:

The terms and provisions of the lease instruments referred to in Schedule A Such language may be incorporated instead into Schedule A by stating, in the write-up of the leasehold estate, that the estate is insured subject to the terms and provisions of the lease. The leasehold estate write-up may contain reference to all assignments of lessee's interest as well as lease amendments (as an alternative, in an uncomplicated leasehold chain the following recital may be used: said lease was assigned by instrument recorded [reference to latest assignment] and by mesne assignments of record.

If a sublease is covered, like reference to the sublease instruments is made, in addition to reference to the master lease documents. If the master lease fails, the sublease may fail as well. Syufy Enterprise v. City of Oakland, 104 Cal. App. 4th 869; 128 Cal Rptr 2d 808 (2002).

A title policy insuring a leasehold estate will include, as exceptions from coverage, any breach of the lease terms as follows:

The effect of any failure to comply with the terms, covenants, conditions, and provisions of the lease described or referred to in Schedule A. Any facts, rights, interests, or claims which are not shown by the public records but which could be ascertained by making inquiry of the lessors in the lease described or referred to in Schedule A

Unless the entire lease is recorded, an exception and requirement for the entire offrecord document is made:

This Company will require that a full copy of any unrecorded lease referred to in Schedule A be furnished to this Company, together with all supplements, assignments and amendments, before issuing any policy of title insurance.

1.3.1. Technically, a memorandum of lease omits operative words of conveyance. A document that contains such operative words of conveyance is properly referred to as a Short Form Lease. The Short Form Lease is usually required for title insurance purposes.

1.3.2. If the leasehold interest is sublet, assigned or encumbered, an examination of the master lease instrument and all amendments thereto will be necessary to confirm the lessee's authority to do so.

1.3.3. The title examiner should verify legislative authority for a lease from any governmental agency and should be aware of the various statutory limitations on the term of such a lease.

1.3.4. Matters affecting the lessor's interest or estate that are recorded after creation of the lease are not usually considered when examining the lessee's interest, unless the lessee is a party to the matter.

A lessee's interest may be subject to satisfaction of a money judgment in certain circumstances. (Code of Civil Procedure section 695.035)

1.3.5. The description of the demised premises need not be in any particular form but must be sufficient to adequately describe the premises. If a shopping center lease is being insured and a plat is attached to the recorded lease in place of a complete description, in addition to consideration of all leasehold write-ups, the title examiner will generally undertake to:

1. Search the entire "underlying" property.
2. Consider all reciprocal easement agreements
3. Insert the following recital above the description:
a. That portion of the following described land, which is included within the leased premises as set out in the Lease or short form thereof recorded ____
4. Show the following items as exceptions from coverage:

Any deficiency in the description of the premises demised by the lease described in Schedule A.
a. Any easement or other right to use those portions of said land not reserved for the exclusive use and possession of the vestee herein.

The second exception above is usually deleted if a comprehensive reciprocal easement agreement has been recorded and incorporated into recorded documents and approved for title insurance purposes.

Any such lease might contain attempted restrictions on the lessor's use, occupation, possession, or development of all other land in the project. Such restrictions should be considered when writing on the remaining land. Those restrictions can range from a lessee's promise of future parking spaces to a flat prohibition against leasing any portion of the remaining land for specified purposes (that might compete with the lessee's business).

1.4. Common Interest Developments
Civil Code section 1351 (c) defines Common Interest Development as follows:
(c) “Common interest development” means any of the following:
(1) A community apartment project.
(2) A condominium project.
(3) A planned development.
(4) A stock cooperative.

Civil Code section 1352 provides for the creation of a common interest development as follows:
“This title applies and a common interest development is created whenever a separate interest coupled with an interest in the common area or membership in the association is, or has been, conveyed, provided, all of the following are recorded:

(a) A declaration.
(b) A condominium plan, if any exists.
(c) A final map or parcel map if …the Government Code requires the recording of either a final map or parcel map for the common interest development.”

1.4.1. Community Apartment Project
A community apartment project ("own-your-own") is a development in which an undivided interest in land is coupled with the right of exclusive occupancy of an apartment located thereon (Civ. Code Section 1351(d)). The community apartment project is generally distinguishable from a stock cooperative in that in a stock cooperative, a corporation generally holds title to the real property and the “owners” hold shares in the title owning corporate entity whereas in a community apartment project, the “owners” own an undivided interest in the land.

1.4.2 Condominium Project
A condominium project involves the undivided or common ownership of a portion of the real property (the common area) coupled with a separate ownership interest in a designated unit. The condominium owner’s interest is most commonly described as an undivided interest in the entire project excepting therefrom the individual condominium units coupled with a separate interest in a specified unit but may also be described as an undivided interest in a designated portion of the property coupled with a separate interest in an individual unit. A condominium project may provide a unit owner with the exclusive use of a portion of the common area such as a balcony, patio, or parking space. (Civ. Code 1351 (f))

1.4.3. Planned Development
A planned development is defined in Civil Code section 1351 (k) as a development (other than a community apartment project, a condominium project, or a stock cooperative) having either or both of the following features:

(1) The common area is owned by an association or in common by the owners of the separate interests who possess appurtenant rights to the beneficial use and enjoyment of the common area.

(2) A power exists in the association to enforce an obligation of an owner of a separate interest with respect to the beneficial use and enjoyment of the common area by means of an assessment which may become a lien upon the separate interest in accordance with Civil Code Section 1367 or 1367.1. 1.4.4. Stock Cooperative

A stock cooperative (often referred to as a co-op) is a development in which a corporation is formed for the purpose of holding title to improved real property in which all or substantially all of the shareholders of the corporation receive a right of exclusive occupancy in a portion of the real property. (Civil Code section 1351 (m)) Real property taxes are generally assessed to the corporate entity holding title to the land and are a lien on the entire project. Such projects are normally financed by a blanket encumbrance constituting a lien on the entire project. Occupants usually own stock or shares in the title-holding corporate entity and occupy their respective residences or apartments by virtue of a lease. A board of directors composed of and elected by the tenant "owners" generally exercises management of the title-holding corporation.

1.4.5. The title examiner usually considers each of the following aspects of common interest ownership in writing up the estate and the description:

1. Common area and the matters that affect it
2. Separate ownership (e.g.: airspace, zero lot-line parcel, "exclusive right of occupancy" in an own-your-own or community apartment, co-op proprietary lease)
3. "Elements" of separate ownership (some plans include garage, patio, parking space or balcony ownership as aggregate parts of the separate ownership interest, and are sometimes included by definition in the declaration of CC&R’s, even without specific reference in the deed out of the subdivider)
4. Correct reference to plan, declaration of CC&R's, deed provisions, deed map, or tract map
5. Exception of all separate ownership interests except that in question where necessary

1.5. Land Sale Contracts
The ordinary sale of real property involves an off-record purchase and sale agreement (or "closing contract") that is fully performed upon closing of the sale through escrow - usually 45 to 60 days or less after signing. Generally, the purchase is financed by means of a "tie-in" purchase money loan secured by a deed of trust against the property in favor of an institutional lender. Another less common method of transferring title is the installment or land sale contract. A land sale contract is an installment contract entered into between a buyer and a seller in which the seller holds title to the property until such time as the buyer has completed making the payments required under the contract. Although the seller retains legal title to the property until completion of payment and conveyance of title, the buyer may obtain an equitable interest in the property pending completion of the sale.

Civil Code sections 2985 et. seq. provide certain protections to the buyer under a land sale contract. For instance, if a land sale contract is not recorded, it is a public offence for the seller to encumber the property with a lien absent the buyer’s consent if the total amount of the encumbrances secured by the property will exceed the balance due on the contract or the periodic payments due on the encumbrances will exceed the periodic payments due under the land sale contract. (Civil Code section 2985.2). It is also a public offense to divert a payment received from a buyer where the seller fails to apply the payment towards payment due under an encumbrance secured by the subject real property. (Civil Code section 2985.3)

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