What is Legal Title?
Legal title in real estate ownership refers to the formal right of an individual or entity to own, use, control, and transfer property. In a legal sense, it distinguishes owners from those having mere possession, such as tenants, squatters, or licensees. Legal title bestows the highest form of legal rights. However, holding legal title comes with numerous responsibilities to the relevant authorities, other owners, and third-parties.
A party may hold legal title, but not be the true and beneficial owner of the title. The holder of legal title may be trustee, executor, agent or other person holding the title for the benefit of others. For example, the legal title to a person’s house may pass on the death of such person to the executor of his estate . Likewise, legal title to a corporation’s physical assets may pass to its director, which is different from the beneficial interest that the prevailing shareholder has in the assets. Similarly, an agent, partner, or custodian may hold legal title to a property for the benefit of the principal, partner, or the owner.
The rights of the legal titleholder include: The legal titleholder has the power to do anything in regard to the property that can be done lawfully, except contravene the rights of the owner (if any). The owner of the property is the person who has the real right to manage the property and benefit from its use. A person who receives the right to sell the property is usually granted the legal title. If the seller and purchaser agree on the sale of property, the title passes to the purchaser.
What is Equitable Title?
Equitable title, in the context of real property law, relates to the actual ownership of a property, or the most beneficial interest one can have in it. It gives the holder an equitable right to obtain full ownership of the property, even though the holder may not have legal title to such property. The doctrine of equitable title is used by the courts to determine who is the real owner of a particular parcel of real estate, despite the names on the title. In other words, if someone makes the argument that he/she owns a particular parcel where the owner of record is another person, courts will apply the rule of equitable title to determine which party should be deemed the true owner.
The holder of equitable title is entitled to the profits and benefits of the subject property, but the holder of legal title has possession and control. In Wisconsin, when one owns equitable title to a piece of real estate, they have the following rights: the right to compel conveyance of the legal title, the right to sue for possession and enjoyment of the property, the right to demand rents and profits, the right to partition in case of co-tenants, the right to contribution for repairs and improvements, the right to recover for waste or estovers, and the right to contribution in case of an action in trespass or ejectment.
Alternatively, the holder of legal title often has little or no financial stake in the subject property. This is because they may be acting as a trustee, or may be keeping the property in the name of the grantee for tax or immigration purposes. In fact, Wisconsin recognizes that equitable owners often do not hold legal title to real estate. Such ownership has been described as "the one with the big chair is the owner".
One can possess equitable title to real estate even if they are not reflected as the owner of record on the title. Examples of when this can occur include in a divorce decree where the court awards one party the rights to the house, but award the other party the net equity of the house as part of the total divorce settlement. In this way, the spouse holding equitable title would hold the big chair and would be responsible for the expenses associated with the house (mortgages, taxes, etc.) until the other spouse aquires his/her share of the equity was fulfilled.
Distinction Between Equitable and Legal Title
To understand the true nature of real property, it is essential to first understand the difference between a legal and an equitable title. The main difference between a legal and an equitable title is that the legal titleholder has legal and physical possession to the property, whereas the equitable title holder would have an ownership or interest in the property but not both. An example of this is a land contract. When the property is sold on a land contract, the buyer receives possession of the property and has physical possession of it; however, the seller or the titleholder holds all rights to the beneficiary interest of the property until the land contract is satisfied.
This is why in a foreclosure case, the bank holds legal title and has the right to possession to foreclose on a property, even when the homeowner holds the equitable title to the property. The bank is the beneficiary, while the homeowner is the legal owner. In cases involving multiple footnotes, the titleholder is usually defined in the property records, and that registered owner is the beneficiary. More times than not, the titleholder is divided between the co-owners of the property in the property records.
Trustee and Beneficiary
The careful distinction between equitable title and legal title has special implications when the concept of a trust is introduced. Generally, there is a legal ownership, whether in an individual or a corporation, and there is an equitable ownership of the same property granted to another individual or corporation. Where the distinction is absent or where there is a conflict between a trustee of such property and a beneficiary, the latter must be compensated for any damages suffered thereby.
Legal and equitable titles to property can be respective of each other and can be held by different parties. There exists a special relationship of duty between the fiduciary and the beneficiary of the trust, and this relationship of trust compels courts of equity to give it the most comprehensive protection.
The trustee holds only the legal estate in trust for the beneficiaries. It is the beneficiary, now, who owns the land. The trustee is the legal owner of the land while the beneficiaries are each an equitable owner in the land. The trustee, therefore, must be the one to sell the land on behalf and for the benefit of the beneficiaries.
Since each beneficiary is now an equitable owner of the land, the beneficiary must be the one to enjoy the benefit of the land. With the passage of a boundary line, the boundary must remain as it is, unless all the beneficiaries agree otherwise.
The concepts of equitable title and legal title are equally significant when a mortgage is involved. The borrower holds legal title to the land, however, may or may not hold the equitable interest at the same time. The legal title, even though ostensibly unencumbered will be subject to the equity which attaches to it in favor of any one of the numerous creditors who may have claims against the equity. Likewise, however slight the equity may be, he who has the legal title, having cultivated and cherished the equity, will be entitled to a full reimbursement, inflexibly, from the least at hand.
The remedy of the court to compensate a party for loss suffered by a breach of trust, is to make him whole by an accounting and payment. A beneficiary can hold the trustee liable for breach of trust where he appreciates a benefit in the value of the land at the expense of the beneficiary. In the case of foreclosure, however, such liability disappears.
Therefore, money obtained from loans raised on certain portions of a property, the proceeds of which are used for the benefit of the entire property or for the benefit of the mortgagor, must first be applied to the mortgage debt and not for other purposes.
The trustee, notwithstanding its position, is equally subject to all the actions and liabilities of a mortgagee, and any limitation or restriction on sale existing in a mortgagor’s mortgage deed, even if not prescribed by statute, is valid against the trustee acting in the capacity of a mortgagee. However, as against a debtor, the provision in the mortgage deed limiting the right of sale would be binding. A provision in such deed restricting the power to dispose of the property in the event of default in payment only protects the debtor who is a party to the transaction. The right of redemption is not an indefeasible right, but a mere equity to redeem that applies only to a debtor.
Purchase and Sale Considerations
The difference between equitable and legal title holds particular significance in real estate transactions. An equitable titleholder is not clearly visible on public records, and such a party may have a claim to a real property interest that is not apparent to a potential buyer when running a title search. As such, when dealing with real estate in which a beneficiary has been acknowledged, trust creditors with a judgment against the beneficiary can sue the trust to collect its judgment before the property is distributed to the beneficiary.
If an equitable titleholder has not been named in the case caption, and legal title does not have notice of a judgment having recently been rendered, legal title could be passed on without regard to the equitable title . For example, a cognizable claim could be made that an equitable titleholder’s interest, even if it is a resulting trust, is a "cloud of title" without regard to the beneficial interest in the property.
It is also important to know how the beneficial interests in a property can either secure the worthless or worth-less beneficial interest of one party or the other. For example, one who lends money to a beneficiary secured by property in joint tenancy or with a spouse could argue that his security interest trumps the beneficiaries’ estate as a whole if they are secured in relationship to their respective beneficial interests in a property. In such a case, a creditor may be entitled to a judicial lien on the property, secured pursuant to California CivilCode sections 722-726 (creating a "judicial lien" as the basis for extinguishing the property by execution sale).
Legal Title and Equitable Interests in the Case Law
Case law has continuously demonstrated the significant part both legal title and equitable interests have played in determining the owner of a piece of land. The role either legal title or equitable interest has played in the ownership of land has been crystallised in a number of decisions ("case law") over time. Legal title and equitable interests have continued to evolve in recent times with the decision in Cadogan v Macedonia (2007) 216 FLR 103, which demonstrated how one may not be able to settle into his/her "new home" if they have "broken the surface".
In 1863, Fry v Tapson (1863) 2 B & S 148 established that there must be a "union of legal and equitable titles" so that a claim for restitution can succeed.
In 1925, Re Evelyn [1925] 1 Ch 8 confirmed that S 191 of the LTA 1925 will not "create an equitable interest based upon a subsequent manifestation of intention" to create it; while in 1940, Machell v Phipps [1940] 2 Ch 63 confirmed that the court may act in the exercise of its "enforcement of trusts jurisdiction [where] the court would protect the equitable interest of the beneficiary of a trust over land by granting an injunction or an order for the specific performance of a contract to convey."
Further, in 1952, Lilley v Littleboy [1952] 1 All ER 241 affirmed that the court will "not grant legal title where there was ‘no valid relationship to which the transferring party intended to commit himself’" and that "the equitable interest created has not been validly disposed of", while in 2001, Re Eagland [2001] 2 FLR 724 affirmed that it is incumbent upon a claimant to demonstrate clearly that a claim to an equitable interest is well founded when "property constitutes a matrimonial home and is at the same time the legal property of a third party who makes no claim to it".
The "common thread" driving these decisions has been the courts’ determinations to ensure that "proprietors are not dispossessed of their property of which they may have held legal title" and that "equitable remedies are afforded to those who have been wronged"; together with an "adequate allowance for the evolving operation of the common law to reflect changes in social customs and practices" which must "continuously respond to modern social concerns".
Practical Tips When Dealing With Title Issues
Disputes over legal vs equitable title are common in property law. These disputes can arise over ownership of property that is subject to a dispute over who actually holds the equitable title or a dispute over who has legal title for property that is held by a legal trustee of a trust, and the trustee ceases to act. There runs an even larger risk of title disputes arising from disputes over beneficiaries and trustees of trusts. Family members can also be involved in these types of disputes. It is common for people to disagree over the amount that they have put into the property or how it has been used, however , at the end of it the judge will order as per the equitable title of the parties and what is just in the eyes of the courts.
Coming to an agreement prior to going to the Supreme Court can be beneficial, as going to Court can often take a long time. Parties should also be aware that if they do not participate in the Court proceedings in good faith, they run the risk of costs being awarded against them. Mediation can normally assist the parties in coming to an agreement. It is recommended that parties give full discovery to each other to ensure no further issues will arise. Legal advice is highly recommended to get the best end result for the parties.