Equitable Title: Legal Definition & Examples

Owning real property is a significant milestone for many Americans, whether they purchase or inherit a new home or a plot of land that they can cultivate and earn from. A common legal concept that one may encounter in acquiring, buying, selling, or passing ownership of property is the concept of equitable title. 

Equitable title definition

In the corporate world, “equity” refers to the amount of capital or investment one owns in a company. Theoretically, it’s possible to have equity and enjoy the rights that go with it without being the actual owner of the company. 

On the other hand, in real estate, when it comes to defining equitable title, this term is explained as “a beneficial interest in real property that gives the title holder the right to acquire legal title to the property.” Although it does not vest full ownership, it entails a right to eventually own the property once the holder of equitable title meets certain conditions.

What are the rights of one who has equitable title to real property?

One who holds equitable title to property usually holds a financial interest in it, such that if it appreciates in value over a certain period, they may stand to benefit from it. They may also have the right to enjoy, access, or possess the property. However, a holder has no right to transfer ownership or sell the property In some cases, they may be permitted to sell their interest in the property, such as when a third party assumes a mortgage from a mortgagor. 

You may often encounter this term in trust and mortgage contracts, which is discussed in greater detail in the latter part of this article.

What is the difference between equitable title and legal title? 

Holding equitable title to real property does not make one the actual owner. The usual rights and obligations that go with ownership are vested in the party who has legal title to the property. This is usually the person (whether an individual or a corporation) whose name appears on the deed to the property.

In a nutshell, equitable title relates to the rights to enjoy the property, while legal title refers to the duties that come with owning the property. The holder of it, for example, may already be able to occupy and use the property. They may also enjoy the fruits of the property, as well as its appreciation in value. On the other hand, the holder of legal title is obligated to pay taxes on the property, unless they executed an agreement to the contrary with the holder.

Only the legal title holder may sell the property, but the equitable title holder may prevent the legal title holder from selling it to a third party. However, the equitable title holder may assign it to a third party, such as when a third party assumes a mortgage agreement. Most states, however, require the consent of the legal owner in order to do this. 

Examples of equitable title

You may encounter issues on equitable title in cases that involve the following:

  • Trusts
  • Mortgage
  • Investments

Equitable title in trusts

A trust is a fiduciary agreement that involves three parties: a trustor (also known as a grantor or settlor), a trustee, and a beneficiary. In a trust agreement, the trustor gives the trustee the right to hold title to and manage property or assets for the benefit of the beneficiary. 

Trusts are a usual estate planning strategy that allows property owners to spare their heirs from lengthy and expensive probate proceedings after death. By setting up a trust, they can control how their properties will be managed prior to passing it on to beneficiaries. 

In a trust agreement, the trustee holds legal title and manages the property or assets. However, it is the beneficiary of the trust who holds equitable title, as they can already benefit from any appreciation in value of the property while the trust is in effect. Upon the expiration of the trust agreement, or when certain conditions have been met, legal title to the property may eventually be passed on to the beneficiary. In cases where there are multiple beneficiaries, the trustor may specify in the trust agreement how it is to be divided.

Equitable title in purchase of real property

Purchasing real property, such as a land or a home, is expensive, which is why many Americans take out a mortgage in order to do so. A mortgage contract is an agreement wherein a borrower takes out a loan from a lender, and the lender has the right to take the property in the event that the borrower fails to pay. 

When a buyer of real property executes a purchase and sale agreement with a seller, the buyer acquires equitable title to the property. This means that they have the right to eventually obtain full legal ownership of the property, as long as they pay the purchase price. This also means that the seller, who still holds the legal title, can no longer sell the property to another party unless the buyer fails to make payments, which may terminate the purchase and sale agreement. Once the purchase price has been fully paid, the legal title shall be transferred to the buyer by transferring and registering the deed to the buyer’s name. 

Equitable title in investments

The concept of equitable title may also apply in investments, especially in real property. For instance, a property investor may invest in land by constructing buildings, improvements, or by planting crops on the land by virtue of an agreement with the owner or legal title holder. They may not hold legal title to the land, but as an investor, they have a beneficial interest in the land and any profits that may be realized from the crops, buildings, or improvements. Depending on their agreement with the legal title holder, they may also have the right to access the property and prevent the legal title holder from selling to a third party.

What if I have a dispute over the title?

In some instances, the legal title holder may get into a legal dispute with the equitable title holder. This occurs when the two parties encounter difficulties in reconciling their rights and interests. Whether you hold equitable title or legal title, it is best to consult a litigation lawyer or property lawyer to advocate for your legal rights and settle disputes in the most cost-efficient and amicable way. 

The Takeaways

Property ownership comes with many complex rights and responsibilities. It can become even more complicated when ownership rights are split between two parties: the equitable title holder and the legal title holder. In order to avoid disputes, it is important for parties to have a detailed understanding as to the rights and duties of each party. 

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