This article demonstrates the use of the quiet title action by owners to clear title of unenforceable claims against title, and distinguishes claims from liens.
Clearing title of adverse claims
On receiving the preliminary title report after opening escrow, brokers are occasionally confronted with unexpected title conditions which will interfere with the closing if not removed from title. Also, off-record claims sometimes arise before or after closing when the broker or the buyer is advised of unrecorded documents which affect title, such as trust deeds, easements or license agreements.
The claims or conditions are called clouds on title. Since clouds interfere with a transaction, the brokers must consider effective ways to eliminate the claims and close the transaction – the original goal of the buyer and the seller.
Presented here, in numerous scenarios, is a common resolution entitled a quiet title action. While the filing of a quiet title action necessarily involves the services of an attorney, the availability of quiet title relief should first be raised by the brokers in an effort to negotiate a resolution for owners confronted with a cloud on title.
Quiet title: an overview
Quiet title is a judicial procedure employed to establish nonpossessory rights in disputes over title to real estate. [Calif. Code of Civil Procedure §760.020]
Title disputes over real estate interests which are resolved by a quiet title action include:
a buyer against the holder of an easement which was unrecorded and unknown on the date of the buyer’s acquisition;
an owner or a buyer against the holder of an expired lien;
one owner against another owner;
a buyer in possession under a land sales contract, lease-option sale or similar security device against a lienholder who is not the seller; or
an adverse possessor against the owner of title.
Other title-clearing remedies, such as cancellation of instruments, removal of a cloud on title, declaratory relief and a partition action, are awarded as part of a quiet title action. Nonjudicial resolutions (privately negotiated) include a release of the recorded instrument. [See first tuesday Form 409]
Conversely, an owner’s possessory remedies, such as ejectment or removal of improvements, are separate causes of action which may be filed with a quiet title action when possession of the property is also in question. Ejectment and encroachment actions address possession, not title, and are unrelated to quiet title actions.
Besides possession, other disputed rights to real estate interests which are not resolved by a quiet title action include:
a lienholder against the owner; or
a buyer against the carryback seller to enforce a security device such as an unexecuted purchase agreement, a land sales contract or a lease-option sale.
Record owner clears title
The record owner of a parcel of real estate eliminates unenforceable claims, recorded or unrecorded, which are adverse to his ownership of the fee title by quieting title of the claim by court order.
Unenforceable claims adverse to a fee owner’s real estate interest which may be cleared from title by a quiet title action include:
easements, right of ways and covenants, conditions and restrictions (CC&Rs);
adverse possession;
options; and
trust deeds and other liens held by creditors.
An owner who is, or is a successor to, a bona fide purchaser can eliminate claims against his interest in the property arising out of an unrecorded interest – a conveyance, lease, lien or use restriction – by completing a quiet title action against the holder of the unrecorded interest.
A bona fide purchaser (BFP) is a buyer of property for value and in good faith who acquired his ownership while unaware of clouds on title which were:
unrecorded;
unapparent from a reasonable inspection of the property; and
unknown to the buyer.
A buyer who purchases property from a BFP is called a successor-in-interest. The successor-in-interest is also considered a BFP – even though the successor may be fully informed about the cloud at the time of his acquisition.
Consider a real estate buyer whose seller does not inform him of an unrecorded easement to a utility company for the maintenance of underground utility lines on the property. The buried utility lines prevent any building on the property.
The easement is not recorded and the lines are not apparent on an inspection of the property.
After acquiring the property, the buyer discovers the existence of the buried utility lines and demands their removal. The buyer seeks to quiet title against the utility company’s claim to an easement on the property.
The utility company claims the buyer cannot quiet title since public interest requires the company to maintain the lines through the property.
Can the buyer obtain the removal of the utility lines and clear the cloud of the easement from the title to the property?
Yes! The buyer is a bona fide purchaser – unaware of the unrecorded and unapparent easement. As a BFP, the buyer has the right to remove the utility lines and quiet title of the easement.
However, if the utility company can show public interest necessitates the continued maintenance of utility lines on the property, the buyer as a BFP is entitled to compensation in a separate action for his lost use of the land, called inverse condemnation. [Pettis v. General Telephone Company of California (1967) 66 C2d 503]
Further, had the buyer (or his broker) known of the unrecorded utility easement, his title to the property would be subject to the easement. The buyer would not then be entitled to a removal of the lines or compensation for inverse condemnation since his prior knowledge would not allow him to qualify as a BFP.
Buyer in escrow quiets title
A buyer, through his broker, locates a parcel of real estate he would like to acquire. During his broker’s due diligence search into property and title conditions, a cloud on title is discovered. A prior owner of the property entered into a restriction agreement prohibiting construction without a neighbor’s prior approval.
The prior-approval agreement was not recorded or brought to the seller’s attention until after the seller acquired title to the property.
The buyer and seller proceed to enter into a purchase agreement contingent on the neighbor’s approval of the buyer’s construction plans.
However, when the buyer requests the neighbor’s approval, the request is refused.
The buyer then seeks to clear title of the cloud by a court ordered cancellation of the restriction agreement in a quiet title action. When cancelled, the buyer will close escrow on the property and proceed with construction, knowing the neighbor cannot enforce the restriction.
The neighbor claims the buyer cannot cancel the agreement since the buyer is not the owner of record on title to the property.
However, the buyer holds an interest in the ownership of the property under a binding purchase agreement. Thus, the buyer can obtain a cancellation of the restriction agreement in a quiet title action as it is a cloud on title.
The buyer is an equitable owner of the property since he holds the contract rights to purchase the property. As an equitable owner of property, the buyer can quiet title against unenforceable claims which are adverse to the buyer’s ownership interest in the property.
Importantly, the seller was unaware of the unrecorded agreement when he purchased the property. Thus, the seller qualifies for bona fide purchaser (BFP) status as the agreement was neither recorded nor brought to his or his agent’s attention before his acquisition. The seller’s BFP status shields both the seller and the buyer, as the successor-in-interest to the seller, from the neighbor’s enforcement of the restriction agreement. [Reiner v. Danial (1989) 211 CA3d 682]
Non-BFP buyers
Real estate is encumbered with a recorded security device, a lien on the property entered into by the owner. The security device does not contain a power-of-sale provision authorizing the seller to nonjudicially foreclose by trustee’s sale, such as in a mortgage-in-fact grant deed, a two-party mortgage, a land sales contract or a lease-option sales agreement.
The owner defaults on the debt secured by the encumbrance and the holder (lender or carryback seller) does not enforce collection.
More than four years after default on all scheduled and balloon payments, the owner conveys his interest in the property to a buyer without satisfying or clearing title of the encumbrance. The buyer acquires ownership, legal or equitable, subject to the known encumbrance.
Now as owner of the property, the buyer files a quiet title action seeking to eliminate the encumbrance claiming:
the debt is uncollectible due to the four-year statute of limitations barring judicial enforcement of obligations arising from written debt instruments, sometimes called an “outlawed debt”; and
the encumbrance is extinguished since no enforceable debt exists to be secured by the property.
The holder of the secured debt claims the buyer cannot eliminate the lien since the buyer purchased the property with full knowledge of the lien. If so, the buyer is not a BFP. In essence, the holder of the debt claims the recorded lien remains valid even though the debt is uncollectible in a court of law due to the passage of time.
Can the buyer quiet title in his name and eliminate the lien from title to the property?
Yes! The status of a BFP is not required to clear title of an extinguishable encumbrance/lien which has not been paid in full. The only out-dated lien which cannot be extinguished by a non-BFP buyer in a quiet title action is a public improvement lien. [Mix v. Sodd (1981) 126 CA3d 386]
A secured money obligation evidenced by a written agreement (recorded security device) – usually a note and trust deed or installment sales contract – becomes judicially unenforceable after a period of time due to the statute of limitations. Scheduled principal and interest payments in default for more than four years cannot be collected through a court action, even when title is vested in the name of the creditor as security for payment of the debt, such as occurs with a land sales contract, a lease-option sale or a mortgage-in-fact grant deed. [CCP §337]
Conversely, a trust deed power-of-sale provision allows nonjudicial private enforcement of a note by a trustee’s sale for 10 years after the note’s final due date. [Calif. Civil Code §882.020]
A trust deed expires and is extinguished from the record:
10 years after the entire debt becomes due; or
60 years after the trust deed is recorded if the due date cannot be ascertained by records of the transaction. [CC §882.020]
Editor’s note — Under prior law, an owner could not quiet title of a lender’s trust deed which was the owner’s personal obligation. It was reasoned that to allow the owner to clear title of the lender’s trust deed while the debt remained unpaid was tantamount to aiding him to avoid his debt. [Mix, supra]
However, all trust deeds now automatically expire, clearing title without the need for a quiet title action after the 10-year or 60-year period. [CC §882.030]
Foreclose, don’t quiet title
When a creditor/lender experiences a default on a debt secured by real estate, he should not attempt to quiet title to the secured real estate in his name. If the secured creditor/lender should quiet title, the owner of the secured real estate is deprived of the right to redeem the real estate and obtain title clear of the debt.
The result of a creditor’s/lender’s quiet title action is a forfeiture of the property to the creditor/lender. Thus, a valuation of each party’s position and an accounting as of the date of cancellation is required – all due to the forfeiture of the owner’s equity since a quiet title action does not provide for the right of redemption.
Accordingly, a secured creditor/lender should always first foreclose by way of a judicial or nonjudicial (trustee’s) foreclosure procedure which provides a notice and opportunity for the borrower to redeem (keep) the property by paying off the debt – no forfeiture of the property due to the default.
Editor’s note — Cal-Vet loans permit forfeiture of the residence on default – no redemption – and are an exception to the mortgage law right-of-redemption policy.
For example, when a buyer defaults on a land sales contract, the seller has three remedies:
rescind the contract as though it never existed and restore the buyer to his pre-contractual position;
enforce the lender’s lien by a judicial foreclosure, or a nonjudicial foreclosure, if a power-of-sale provision exists; or
terminate all rights under the contract by a quiet title action, sometimes called strict foreclosure.
When rescinding a land sales contract (or lease-option sale), the seller on recovering the property (voluntarily or by eviction) is required to account and restore to the buyer all the money he received under the contract. Thus, everyone will be placed in their original position, as though the transaction had never occurred, called restoration. Offsets are given to the seller for the rental value of the property during the entire period of the buyer’s occupancy. In turn, the buyer receives credit for all payments made toward principal and interest under the contract.
Conversely, when the seller sues to quiet title, the seller is not restoring the parties to their pre-contractual positions. By quieting title, the seller is affirming and enforcing the contract – from inception to default – since he acts on the default by terminating the contract and forfeiting the buyer’s equity in the property.
When the seller who carries an installment sales contract quiets title to terminate all the buyer’s contract rights to acquire the property due to the breach, the buyer is entitled to restitution.
Restitution is an accounting between the buyer and seller which may well result in a refund to the buyer in exchange for the return of the property to the seller. However, if the property value has dropped and no credits are owed to the buyer to offset the drop in the value, no money judgment for the deficiency is available to the seller. [CCP §580(b)]
For example, a buyer purchases real estate under a land sales contract for the price of $185,000. A down payment is made. To pay the balance of the purchase price, the buyer agrees to takeover payments on an existing trust deed note. Also, installments are due the seller for the balance of his equity in the property.
The buyer takes possession and makes principal and interest installments to the seller, as well as payments on the trust deed note.
Later, the buyer defaults on his payments to the seller, a material breach of the land sales contract. The seller declares the contract terminated. The fair market value of the property on the date of the breach is $165,000.
The buyer then refuses to surrender possession of the property and continues to make principal and interest payments on the trust deed.
The seller sues to quiet title. A receiver is appointed to operate and maintain the property during the trial.
The seller regains possession of the property and the court calls for an accounting.
The seller’s losses include:
the benefit of his bargain under the land sales contract;
out-of-pocket expenses caused by the breach; and
other expenditures which are a consequence of the breach, called consequential damages.
During the buyer’s equitable ownership of the property prior to his breach, the seller’s benefit of the bargain under the land sales contract is calculated as the purchase price, less the current value of the property as of the date of breach (if it is lower). Here, the seller’s lost benefit of the bargain is $20,000 – the price of $185,000 less the property’s lower current value of $165,000.
However, the seller is also entitled to out-of-pocket losses for the buyer’s wrongful retention of the property after the date of the breach. After the date of the breach, the buyer’s continued possession of the property is treated as though he were renting it, not buying it and owing interest, since his purchase contract and his ownership has been terminated.
Accordingly, the seller is owed the fair rental value of the property from the date of the breach to the eviction of the buyer. Rent compensates the seller for the seller’s loss of use during the buyer’s wrongful (holdover) possession of the property. [CC §3307]
The repossessing seller also receives credit for any expenses that are the natural consequence of the buyer’s breach, including:
payment of delinquent real estate taxes prior to termination of the contract;
payment of any assessment bonds or association fees until termination of the contract;
payment of penalties or fees for reinstating the trust deed;
receivership costs;
resale costs if the property is resold; and
the cost to repair/replace any damage to the physical property over normal wear and tear.
On the other hand, the buyer having forfeited all rights to the property due to the breach gets credit for:
the down payment;
installments of principal paid to the seller on the land sales contract, excluding interest;
principal payments on the trust deed note paid by the buyer prior to termination of the land sales contract, excluding interest;
principal and interest payments paid by the buyer after termination of the land sales contract (during the buyer’s wrongful possession of the property); and
any expenses paid by the buyer after the breach which the seller should have paid, such as care, maintenance and further improvements to the property since the buyer’s ownership interest has been terminated.
The buyer’s payments of interest to the seller during his equitable ownership are not an offset and are retained by the seller since the interest payments are the seller’s earnings for the buyer’s use of the principal remaining due on the purchase price. The interest paid to the holder of the trust deed note prior to termination of the land sales contract is also not an offset since interest is part of the buyer’s burden of ownership under the land sales contract. Owners, equitable or legal, do not owe rent for their possession since they own the right to occupy (or let) the property.
However, interest paid on the trust deed by the buyer after the termination of the land sales contract is a credit due the buyer since, on the seller’s termination of the land sales contract and commencement of the buyer’s wrongful possession, the buyer only owes rent (which replaces any obligation to pay interest on the unpaid purchase price under the terminated land sales contract).
After the accounting is complete, if the amount the buyer is entitled to is greater than the credit the seller received for his losses, the buyer is entitled to a refund of the difference, called restitution. Restitution is the excess of the buyer’s payments over the money losses incurred by the seller due to the buyer’s breach of the contract and holdover of possession. [Kudokas v. Balkus (1972) 26 CA3d 744]
The negotiation and execution of a deed-in-lieu of foreclosure on the land sales contract or lease-option sale would avoid the litigation and accomplish the same end result – recovery of the property and settlement. [See first tuesday Form 406]
Equitable ownership agreements
Equitable owners have not yet received a grant deed to the real estate they purchased. However, an equitable owner may quiet title of adverse claims which threaten his ownership interest in the property.
Equitable owners include:
beneficiaries of an irrevocable trust, but not of a revocable inter vivos (living) trust;
buyers in possession under a contract for deed, land sales contract or lease-option sale;
buyers in escrow under purchase agreements; and
owners in possession who have been defrauded of their legal title.
For example, four individuals buy a parcel of real estate as co-owners. An irrevocable trust agreement is entered into by the co-owners as beneficiaries.
One of the beneficiaries holds legal title to the property in his individual name, as trustee under the trust agreement. As trustee, he annually pays the real estate taxes from funds contributed by all co-owners.
The beneficiaries further agree each is to possess a separate portion of the real estate which they are to exclusively occupy, called divided interests.
One of the beneficiaries conveys his divided portion to his daughter. The daughter takes possession and holds the portion of the real estate for more than five years.
The daughter then seeks to quiet title in her name to the portion she exclusively possesses as against the other beneficiaries and the trustee, claiming she acquired title to her portion through adverse possession.
Can the daughter quiet title against the other beneficiaries and the trustee?
Yes and no! Yes, the daughter can quiet title against any claims the other beneficiaries may have in the portion of the real estate she exclusively occupies. However, she cannot quiet title in her name as against the trustee since he holds title and pays the taxes. Thus, title remains in the name of the trustee.
Unlike a limited partnership or limited liability company (LLC) vesting which creates a separate entity to own the property, a trustee merely holds title for the benefit of each occupant who is a beneficiary of the trust agreement.
As a successor-in-interest to one of the beneficiaries, the daughter is a beneficiary of the trust. Thus, she holds an equitable ownership interest to the portion of the real estate exclusively occupied by her and her predecessor. No entity intervenes as the owner of her portion by holding title, such as an LLC.
To take title from the trustee to the portion exclusively possessed by a beneficiary, the beneficiary is limited to enforcement of the trust agreement. [Tuffree v. Polhemus (1895) 108 C 670]
Similarly, a buyer under a purchase agreement which is yet to be performed by closing escrow, or an optionee under an option, is an equitable owner. However, buyers may not use a quiet title action to resolve their claims to fee title against the owner of record who has agreed under a purchase agreement or option to sell them the property.
The buyer’s or optionee’s remedy against the owner is specific performance of the purchase agreement or the option.
Yet-to-be-performed real estate agreements which are enforced by specific performance include purchase agreements and escrow instructions, trust deed notes, leases and options.
Editor’s note — Quieting title and partitioning real estate against the other co-owners gives rise to subdivision issues.
Unless recorded in a grant deed or lease, a partnership agreement giving a partner exclusive occupancy of a portion of the real estate does not violate subdivision law as long as the partnership pays all expenses on the property from contributions, not from rent paid by the partners.[Santa Monica Rent Control Board v. Bluvshtein (1991) 230 CA3d 308 (decided on a rent control issue); Bakanauskas v. Urdan (1988) 206 CA3d 621]
Further, the purchase of rental or investment property by five or more co-owners vested as tenants in common creates a subdivision requiring clearance from the Department of Real Estate (DRE) except in cases where the undivided interests are:
held by people related by blood or marriage;
created as a result of a foreclosure sale;
created by a valid court order;
offered and sold by permission of the Commissioner of Corporations according to the Corporate Securities Law of 1968; or
in real estate offered for sale as a time share project. [Calif. Business and Professions Code §11000.1]
Also, a subdivision is not created when the undivided interests are purchased by less than 10 people who each give a signed statement to the Real Estate Commissioner acknowledging that they are:
fully informed about ownership risks;
purchasing the interest for themselves without present intention to resell the interest; and
waiving any protections afforded under a subdivision. [B & P C §11000.1(b)(2)]
Unrecorded owner in possession
Consider a buyer of real estate under a land sales contract. The seller retains title as security for the buyer’s payment of the unpaid balance of the purchase price.
The buyer then enters into a construction agreement with a contractor to improve the property he acquired. The contractor is to build four houses on the property and pay the balance remaining due on the purchase price under the land sales contract.
In exchange, the contractor is to receive a 75% ownership interest in the property – a co-owner with the buyer.
As agreed, the contractor pays off the balance due on the land sales contract. However, the seller conveys title to the contractor, not the buyer named in the land sales contract. The buyer occupies one of the residences on the property.
The contractor then encumbers the property with a trust deed loan without the consent of the buyer whose 25% co-ownership interest is not recorded.
Neither the lender holding the trust deed nor the title company insuring the trust deed inspect the property for occupants, much less inquire as to any interest in the property held by others. Thus, the lender is actually unaware the co-owner of a 25% undivided interest exists or occupies the property.
Later, the buyer learns of the lender’s trust deed encumbrance and seeks to quiet title against the lender’s lien on the buyer’s unrecorded 25% ownership interest in the property.
The lender claims the buyer cannot quiet title of its security interest since the buyer is not the owner of record.
However, when originating a loan, the lender has a duty to inspect the property, as well as the record title, for any off-record claims to title before making a loan secured by the real estate. The buyer’s actual possession of the property places the lender on constructive notice of the buyer’s ownership interest.
Thus, the trust deed lien never attached to the buyer’s unrecorded ownership interest and the quiet title action extinguishes the trust deed lien from the buyer’s 25% undivided ownership interest in the property. [Dement v. Pierce (1932) 122 CA 254]
Protecting non-fee title interests
The holder of an interest in real estate other than the fee title, such as an easement, right of way, lien, lease, option or by adverse possession, may also use a quiet title action to eliminate claims which challenge his rights in the real estate.
Non-fee interests, such as possession held by tenants, may be protected by use of a quiet title action – although the tenant’s interest is not based on ownership of the real estate and title cannot be quieted in their name. [Tuffree, supra]
Only an occupant who can establish a claim of title to property, such as by adverse possession or equitable ownership, can quiet title to the property in his name and become the owner of record.
For example, a husband and wife dissolve their marriage. The wife is awarded the community residence and the husband is ordered to transfer possession of the residence to the wife.
Accordingly, the wife asks the husband to vacate the property. However, the husband remains in possession of the property for more than five years after ownership of the property is awarded to the wife. During the entire period, the husband pays the taxes and other costs for maintaining and carrying the property. The wife takes no legal action to evict him.
Claiming title by adverse possession, the husband files a quiet title action to eliminate the wife’s recorded ownership interest in the property. The wife claims the husband cannot quiet title since his possession is in violation of a court order.
Can the husband quiet title even though the possession is wrongful?
Yes! The husband has acquired title by adverse possession. The husband’s possession is hostile (he will not vacate when asked) and he has paid the taxes for a period of five years or more.
An individual claiming adverse possession must have hostile possession without the owner’s stated or implied permission, must pay taxes and all encumbrances on the property and wait out the required five-year period in possession of the property (without being evicted) to gain legal title to the property. [Buic v. Buic (1992) 5 CA4th 1600]
Squatter’s rights
The owner of record to real estate has not occupied his property for over five years.
A squatter has possession and claims to be the true owner, but has not paid property taxes. The owner seeks to quiet title of the squatter’s claim to ownership and remove him from the property by ejectment.
The squatter claims the owner is barred from recovering the property and ejecting him since the owner has not once himself been in physical possession of the property within the last five years.
Can the owner quiet title of the squatter’s claim and remove the squatter from possession of the property?
Yes! The squatter is unable to establish a right to title by adverse possession – he has not paid the taxes on the property. Also, the owner of record at all times has the right to immediate possession of the property by ejectment of anyone not legally in possession or cannot prove up an adverse possession claim. Thus, the owner is able to quiet title against the squatter’s claims. [Tobin v. Stevens (1988) 204 CA3d 945]
Five years to perfect title
A creditor records an abstract of judgment. The abstract attaches as a lien on title to a parcel of real estate since it is vested of record in the name of the judgment debtor.
The judgment debtor later sells and conveys the property to a buyer.
The creditor obtains a writ of execution to foreclose the judgment lien and is the highest bidder at the sheriff’s sale. The creditor receives a certificate of sale entitling him to a sheriff’s deed and immediate possession of the property. However, the interest acquired in the property has no present value to the creditor due to the amount of the encumbrances with priority.
The buyer remains in possession.
The creditor waits more than five years after the sheriff’s sale, when the value of the property has increased, to obtain and record the sheriff’s deed. The creditor then files a quiet title action against the buyer, claiming the sheriff’s deed gives the creditor legal title and the right to possession.
The buyer claims the creditor has no right to the property since the creditor did not possess or hold title to the property within the five year period after the date of the sheriff’s sale.
Is the creditor entitled to the property?
No! The creditor is barred from asserting a claim to the property. The creditor’s right to record the sheriff’s deed and take possession of the property and eject the occupant first arose on the date he purchased the property at the sheriff’s sale. A five-year statute of limitations begins to run on the creditor’s right to recover the property from the date it is first possible for the creditor to bring suit to eject the buyer – the date of the sheriff’s sale.
By the five-year delay in recording the sheriff’s deed, the creditor lost his right to recover the property. An injunction against the creditor’s claim to ownership clears the buyer’s title of the creditor’s stale and unenforceable sheriff’s deed. [Lawrence v. Maloof (1967) 256 CA2d 600]
Had the creditor obtained and recorded the sheriff’s deed within five years after the sheriff’s sale, the creditor would have become the owner of record entitled to possession since the deed would be enforceable. Then, the buyer would be forced to prove his claim to title as an adverse possessor by his payment of taxes and possession for five years.
