By Richard Baker
Over the years, one of the reoccurring legal problems that our church clients encounter is the question of who actually owns the real estate that the church sits on. In our practice, this question is not relegated to small or older churches but includes newer and large churches and everything in between. While there are many challenges that may affect the title to the church property, one of the most common is a ‘gap in the chain of title.’ Put in plain English, there is a gap in the succession of ownership of the property which leaves the current church occupant not appearing as the owner in the records at the County Recorder’s Office. And for ownership purposes, those records are crucial.
So, as they say, “it isn’t a problem until it is.” And then, it can be a big problem. The problem is usually discovered when the church is in the middle of a transaction involving its real estate in which it must prove that it has “good title” to the property. And, of course, at that point, there is usually a looming deadline. Transactions where this issue comes up commonly include the sale of property, application for real estate tax exemption, church mergers, refinancing, loans for repairs, and insurance claims. If the church cannot prove it owns the property – it can’t complete the transaction.
One recent example where this came up is a church client that has a leaky roof desperately in need of repair. Since roofing can be costly, the church applied for a loan. The lender required a title search to establish that its mortgage will be valid against the property should there be a default on the loan. In the process of obtaining the title commitment, however, the church discovered that there is a gap in its chain of title. As a result, the church was not able to get a loan.
Once the gap in title is discovered, solving the mystery of how to fill the gap can be a real challenge. Often, many years have passed since the gap occurred which makes it a difficult and costly process. In solving the mystery there are a few scenarios that reoccur frequently. Most common situations involve transactions where the deal was done “in house” directly between the transferor and transferee without aid of either an attorney or a title company. In these transactions, the deeds are usually “quit claim” deeds rather than warranty deeds and no title insurance was obtained. Since a quit claim deed simply gives to the transferee whatever the transferor owned, if the transferor didn’t own anything or the property was otherwise encumbered, the transferee would take the property subject to that condition. Also, wrong parties often sign these deeds for lack of technical legal knowledge, or the deeds are legally deficient.
Another common scenario involves church closure. We are seeing more and more closures as more and more churches see their membership dwindling. Often, upon closing, the property is either given back or reverts back by default to the defunct church’s denomination or its mission board. From there the denomination transfers ownership to one of its member churches. Again, if done without proper examination and documentation, the title of the property can appear to still be in the defunct church’s name, awaiting discovery by future leadership of the transferee church at a point of crisis.
And yet another variation of the common scenario is when a church has been around for so long that it simply can’t locate the necessary records to clear up any gap in title. An example of this was a client church that was founded in the 19th century. There was no record with the County or State of a church with the client’s name and the church could not find any documents to prove its status as a corporation. Of course, this affected its ability to prove ownership of the real estate which became a major issue in a merger with another church.
So, what’s to be done when your church finds itself in this difficult position? Generally, if you can get a title company to insure the property, the transaction can be completed. Working with a title company, the attorneys and church will attempt to reconstruct the chain of title, filling in the gaps. To do the restructure the parties will search to find enough documentation to convince the title company that the property really belongs to the church and to clear the record with the County. This process involves digging in the County or State’s records, tracing down previous owners and attempting to get the proper documentation as well as a lot of creativity. Sometimes, it can be shown that an organization changed its name and so the gap is only apparent. Other times the denomination’s main office may be able to assist in the reconstruction of the records to show that the gap is only apparent or a deed exists that was never recorded. What if one cannot reconstruct the chain of title? In that case, the last resort is to go to court. There are various remedies available including a claim of adverse possession, depending on how long the church has occupied the building.
The old real estate adage is proved true: “reconstruction is more costly than new construction.” In this case, reconstructing the chain of title is far more costly than taking the time to do it right the first time. Given the stakes, what can your church do now with property it already owns? Solomon had some good advice when he said: “Go to the ant, thou sluggard; Consider her ways and be wise: Which have no guide, Overseer, or ruler, provideth her meat in the summer; and gathereth her food in the harvest.” (Prov. 6:6-8.) Following that advice, the first step may be to gather your documents and make sure you don’t have a gap in title. If you do, it is better to address it now, before your church is involved in a transaction requiring proof of good title when time is short and the need is great.
