WHY TITLE INSURANCE IS NEEDED
Thursday, April 16 2009 @ 07:13 PM EDT
Contributed by: Kevin Bradley
By: Steven Rich, Marketing Manager & Jessica Angulo, Attorney for Panama Offshore Legal Services
Two foreigners bought real estate in Panama in 2006 from a seller who produced a “Paz y Salvo” certificate from the Ministry of Finance showing that he owed no property taxes.
In reality, when the seller bought the property it was improperly registered with the Ministry of Finance’s Cadastro office, which determines property taxes. The seller should have been paying higher property taxes.
The Ministry of Finance (MEF) discovered the error and levied an $11,000 property tax lien on the property against the buyers.
The buyers petitioned MEF to admit their error and exonerate the new owners from paying it. MEF refused explaining that the $11,000 past due property taxes remain with the property as a lien regardless of who owns the property.
The buyers could sue the seller since the sales contract states that the seller transfers title to the property without any “liens”. However, lawsuits in Panama take many years before going to trial with more years of appeals and lots of money spent in lawyer’s fees.
This erroneous certificate of incumbency (Paz y Salvo) reflecting an error by MEF in calculating the annual property taxes resulted in an $11,000 “hidden lien” which the buyers couldn’t find out about during their title search prior to receiving title to the property.
According to Hector Boet of Lawyers Title Central America’s Panama office, “Definitely our policy covers liens and encumbrances such as the one mentioned above which affected this buyer.”
Hidden liens are one of the many defects that title insurance protects buyers against in Panama.
United States title insurance companies operate in Panama like Lawyers Title Central America.
Let us explain title insurance.
Title is a term describing your legal rights to own, possess, use, and transfer title to others. A title search determines if the property is free and clear of defects and encumbrances before transferring title.
A defect is something missing from the title. A previous owner’s undisclosed heir who can file a claim on the property is a defect. The seller’s spouse who didn’t sign off on the title transfer is another defect.
Encumbrance is a claim made upon the property by a 3rd party like a power company having an easement for a power line running through your property. A lien is another type of encumbrance. Unpaid property taxes automatically become a lien on a property. A court judgment against the seller also can act as a lien on the property.
Lenders always require that title be free and clear of all defects and encumbrances prior to issuing a mortgage on the property before transferring title to the purchaser.
Title search is a detailed examination of the property’s history in the public records including deeds, court records and liens. A title search should show all title defects and encumbrances as well as liens and other restrictions. Among these are unpaid taxes, unsatisfied mortgages, judgments against the seller and restrictions limiting the use of the land.
Title searches are not foolproof. Even the most diligent title search may never reveal some hidden defects. For instance, the previous owner could have incorrectly stated his or her marital status, resulting in a possible claim by a legal spouse. Other hidden defects include fraud, forgery, defective deeds, mental incompetence, and clerical errors in the records. These defects can arise after you purchase property and can jeopardize the right to ownership.
Deeds do not guarantee title because they only show transfer of ownership. If the transfer was defective or hidden liens or encumbrances exist, the deed could be challenged.
Title insurance protects buyers from all defects, encumbrances, and hidden liens. In this case, the title insurance policy would have paid the $11,000 hidden tax lien.
Title insurance usually costs around 1% of the sales price. Title Insurance Companies generally have “authorized law firms” that are qualified to process the title report, such as Panama Offshore Legal Services.
For more information or a personal quote call: Carmen 322-1605 or Kevin 322-1603