Legal & Equitable Title: Differences & Importance

Lesson Transcript
Instructor: Shawn Grimsley

Shawn has a masters of public administration, JD, and a BA in political science.

Title, or ownership, of a property can fall into two categories: legal and equitable. Learn about these title types, and understand their difference and real-world applications. Updated: 11/30/2021

Title Defined

If you own your home, you are said to have title to it. Title is a general term used in real estate that means ownership over a parcel of real estate. If you have title, you have the right to possess the real estate. You also hold a bundle of legal rights related to ownership, such as the right to occupy, use, enjoy, control, and transfer the property unless one or more of these rights have been transferred to someone else. Interestingly, title to a parcel of real estate can be split, where one person holds some of the rights and another person holds the other rights. Let's take a look.

Legal Title vs. Equitable Title

Title to a property can be split into legal title and equitable title. Legal title represents the legal ownership along with the right to control the property in many circumstances. Legal title is transferred from one person to another by a deed. On the other hand, the holder of the equitable title has the right to the use, enjoyment, and benefit of the real estate. For example, if Alvin holds legal title to a house, but Beth holds the equitable title to it, Alvin is recognized as the legal owner but is not entitled to the use and enjoyment of the house. Since Beth only holds equitable title, she doesn't own the house but she does have the right to use and enjoy it, something that Alvin doesn't get to do.

Land Sale Contracts

Title to real estate bought through a land sale contract is split into legal title and equitable title. A land sale contract is also known as a contract for deed or a real estate installment contract. It's a transaction where the owner of a parcel of land agrees to sell the real estate to a purchaser on an installment basis, which means that the buyer will make a series of payments over a particular period of time rather than making one lump sum payment. Let's look at an example.

Wendy owns a house and decides to sell it to her friend Zack. Zack is unable to obtain a bank loan so Wendy agrees to let Zack pay for the house over a ten-year period with 120 equal monthly payments. While Wendy let's Zack move into the house and use it, Wendy does not deed the house to Zack. Instead, she keeps title in her name to make sure Zack keeps paying. The law generally will recognize that while Wendy holds legal title over the property, Zack holds equitable title. Wendy really is just acting as a lender and keeping the title as a form of security to ensure that Zack keeps his end of the bargain. While Wendy still legally owns the house, it's Zack who gets to make beneficial use of it. When Zack makes his final payment, he should receive a deed that will give him legal title, resulting in his equitable title and legal title merging.

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