Property law can become quite convoluted in countries with sophisticated land laws. Equitable title is a concept that occurs in such an environment. Unlike legal title, equitable title carries fewer rights to a piece of land and the entity holding equitable title must understand the boundaries of what is possible when holding such a title.
In this post, we will look at what equitable title means, compare it to legal title, and consider where and when you might consider using equitable title.
Defining Equitable Title
If you notice, the word equitable is similar to the term equity. Equity in a property is the share that could be considered to be owned when the land is not owned outright. People often use the equity in their homes, the amount of money they have already paid for the mortgage, as the basis for a small loan.
Equitable is similar in that you see it used in situations where one person has the benefit of the land while another owns it. LegalMatch.com puts it this way:
“…equitable title refers to a person’s right to obtain full ownership of a property or property interest…Legal title is actual ownership of the land. A person with legal title to land has the right to transfer ownership of the property to another party.”
Left unsaid is that the person with equitable title may not transfer ownership to another party.
Defining Legal Title
As you see from above, legal title is bestowed on the entity with full ownership rights to the land.
- Exclusive possession, use, acquisition, and conveyance
- Access to an easement, hypothecation*, and partition
- Water, mineral, timber, farming, hunting, and grazing rights
- Easement to the neighboring property for utility lines
- Tenancy improvements
- Air rights
- Development rights to erect improvements
- Appearance rights subject to local zoning and deed restrictions and ordinances
Legal title is enforceable in a court of law. Someone with equity rights only not only does not have the rights to any of the listed activities, but the legal title holder can also take action against the equity title holder for attempting to access these rights and win.
Hypothecation is used when an asset, such as real property, is used as collateral in a loan without giving up possession, title, or ownership rights.
Using Equitable Title
Equitable title is used in situations where full ownership of the property is not appropriate or wanted. The primary use of equitable title is found in forming a trust.
When a property owner wishes to transfer property to beneficiaries, the property is held by a trustee to whom legal title has been transferred. Typically, the trustee holds the title for a specified time indicated by the property owner. During this time, the trustee has legal title while the beneficiaries have equitable title.
In many instances, the beneficiaries may enjoy the use of the land but do not have the right to sell it or divide it. In other situations, the property may be improved, and the beneficiaries receive the profits of the improvements or rising real estate values.
You may also see the terms "naked title" or "bare legal title" used for the title held by the trustee. In this case, the trustee has control over the property, but the courts recognize that the rights to the property belong to the beneficiaries, who hold equitable title. In hypothecation mortgages, a third party holds a “naked” title until the mortgage is paid.
Another common use of equitable title is in a contract for deed or land contract.
- A land seller finances a person who is buying the property. It may be an individual, or it could be a bank providing the loan that holds legal title.
- The seller allows the buyer to live on the property, thereby “enjoying” the use of the land without true ownership.
- The buyer makes payments on the property until the debt is paid in full.
- At the time of full debt payment, the seller transfers legal title to the buyer.
Once the buyer completes the payments, he or she holds both legal and equitable title (also called a merger).
Finally, a regular real estate sale may involve equitable title. Instead of the buyer receiving legal title upon the completion of a contract, only equitable title is held until the sale is “closed,” and the deed delivered to the new owner. Then, and only then, is the buyer considered to have legal title.
Equitable Title and Quiet Title Actions
A quiet title action is a legal remedy to protect all parties to a disagreement over who has the legal title over a piece of land. However, an entity with equitable title is not considered the owner of a property and, therefore, cannot be party to or maintain a quiet title action.
There is an exception.
When the property owner has committed fraud to acquire the land, that entity may not win in litigation against the equitable title holder when a quiet title action takes place. It comes down to who has the appropriate evidence and clear claim.
Conveying Legal Title
Once an individual, such as a land buyer, who currently holds equitable title through the interest in the property, has made the final payment on the purchase price, that person can demand the transfer of the legal title.
Legal title can be conveyed through a deed, contract, assignment, or mortgage.
Equitable title is held by a party which then may “enjoy and use” a given property without absolute ownership of the property. Equitable title is used in cases where the legal title is being held in trust for one or beneficiaries, when one party is purchasing the land but has not paid the full purchase price, or as part of a real estate sale in which the buyer has equitable title only until the sale is “closed.”
Property law has become complicated in the United States, and title in land can be held in a variety of ways. The difference between equitable title and legal title tends to be vague in these days of long mortgages and complex land deals.
However, understanding equitable title is essential for land buyers and sellers alike to protect the asset and their rights with respect to the property.