Title issues and how to mitigate them in Real Estate finance deals

Class of title

When a property’s title is registered with the Land Registry, it is assigned a class of title that reflects the certainty of ownership. The four primary classes are:

Absolute title: The most secure and desirable classification, indicating the Land Registry is satisfied that no one else can claim ownership of the property.
Good leasehold title: Typically granted for leasehold interests where the freehold title is unregistered, often due to historical reasons.
Possessory title: Issued when ownership is claimed through possession rather than definitive documentation, such as in cases of adverse possession.
Qualified title: The least common classification granted when there is a known defect in the title, such as an unresolved dispute or pending claim.

Mitigation: While absolute title is the gold standard, properties with other classifications can often be protected with indemnity insurance. This policy safeguards against potential future claims of ownership and compensates for any resulting losses. It is prudent to keep a copy of the indemnity policy with the property deeds to avoid the need for new policies during future refinancing, sales or lettings. Alternatively, if ownership evidence is available either at the time of the refinance or later on, an application can be made to the Land Registry to upgrade the class of title.

Restrictive covenants

Restrictive covenants are obligations imposed on the property owner to refrain from certain activities or uses, often for the benefit of a dominant landowner. Examples include, but are not limited to, restrictions on using the property for anything other than a single private dwelling or obligations to maintain boundary features such as fences. Breaching a restrictive covenant could lead to legal action from the dominant landowner.

Mitigation: If a potential breach or uncertainty over enforceability arises, the following measures can mitigate the risk:

Seek a legal opinion to assess the enforceability of the covenant and identify the parties who benefit from it.
Negotiate a deed of release with the dominant landowner and register the release with the Land Registry.
Lastly if the above is not available or unlikely to succeed then indemnity insurance may be available to cover this risk.
There may be cases where there is an entry on the property register confirming the existence of restrictive covenants, but the exact wording is unknown as the original deeds are unavailable. It is advisable to secure indemnity insurance as it protects against inadvertent breaches of unknown covenants.

Rights and easements

Understanding both the rights a property benefits from and the obligations it is subject to is critical to avoiding future disputes and ensuring the property’s usability and value. Common easements include rights of way, access to utilities, and rights to enter neighbouring land for repairs.

Mitigation: If the property lacks essential rights, such as access for entry or services, a deed of easement should be negotiated and registered with the Land Registry to ensure legal recognition of the right.

Restrictions on title

Restrictions on title are designed to protect third-party interests, such as existing mortgages or the rights of management companies. These restrictions often require third-party consent or compliance with specific conditions before transactions can proceed.

Mitigation: Where restrictions appear on the title, it is essential to assess their implications for current and future transactions. Early engagement with the relevant third parties to satisfy their requirements can prevent delays. In some instances, obsolete restrictions may be removed by application to the Land Registry. Addressing these matters promptly is key to ensuring smooth progress in the transaction.

Conclusion

Proactively addressing title issues is vital to avoid delays and complications in real estate finance transactions. Although indemnity insurance is widely accepted by lenders, buyers and tenants as a straightforward solution, it is not a permanent remedy, and additional measures may be necessary to fully address the defect. Understanding the terms of such policies and consulting a solicitor ensures the most appropriate course of action is taken for your specific circumstances.

The key takeaway is to resolve title issues early and maintain a complete set of property documents. This approach facilitates smoother transactions and protects the property’s value and usability.