Correcting out-of-date and inaccurate property titles isn’t on the top of many to-do lists, but the consequences of ignoring them could prove dramatic, especially if the congregation decides to sell the property.
The best way to avoid any property title pitfalls is to pull a preliminary title report. The report contains a host of information, including the owner of the property, a legal description of the property, and financial claims against it.
Just looking at those three items can reveal four potential problems for congregations looking to build, modify, or sell their property.
A preliminary title report will show who the listed owner of a property is. That doesn’t sound controversial, but it can be.
For tax and legal advantages, most churches of size incorporate under state law. If a church changes its name, the previous name becomes inactive.
The problem comes when a church buys a property under one name, then changes its name but does not update the property title. If it ever decides to sell the property, it will find an inactive corporation listed as the owner. Inactive corporations can’t sell property.
A common way for this to happen is when two congregations merge. They keep one building, sell the other and change their name to reflect their new, combined status. Updating their property information at the time isn’t onerous, but it will be after 20 years when a new generation of church leadership has to find the necessary paperwork to file before a closing deadline to sell the property.
Another item on a preliminary title report is a legal description of a property’s boundaries as well as any restrictions placed on it, including restrictions on use or public or private easements.
These details can be critical when making decisions about property improvement. There might be a fence that everyone thought ran along the property line that is actually five feet inside of it. That could mean the addition everyone wished there was room for is actually possible.
It could also mean that the addition everyone wants to build would actually sit on top of a public utility easement that no one realized was there. Or that the new playground would block the access easement the neighbor holds.
Title restrictions limit the use of a property for a specified period of time. If the property were donated to a congregation, the donor might put a restriction that the building must be used as a house of worship for 50 years. That has significant implications for the value of that property during that period of time.
As a way to collect back taxes, municipalities can place liens on properties. In a worst-case scenario, a municipality can take ownership of a property and auction it off to collect the back taxes. That’s rare, however, for a church.
More common is that the lien just sits, gets forgotten about, and becomes an issue whenever the congregation tries to sell the property. At the sale, a portion of the proceeds will automatically go toward re-paying the lien, which reduces the amount that goes to the congregation. If that money was fully earmarked for the purchase of another property or for another budget priority, that could cause a problem.
Old utility bills function the same as back taxes. Eventually, they will be converted into liens against the property, and the first portion of any sale proceeds will go toward paying them off.
There’s a property term called “reconveyance,” which is the process that happens when a mortgage is paid off and removed from a property’s title. Sometimes, that process doesn’t happen like it should and an old loan will still be listed on the property record as being active.
This can have enormous consequences for a congregation trying to sell its building because it means before they can close on their sale, they have to go back and track down the mortgage lender to get documentation that the loan is no longer active. Many lenders went out of business 10 years ago during the recession, so that paperwork might be difficult to find — perhaps impossible on short notice.
The best recourse at that point is for the congregation to buy for a bond that covers the amount of the old loan. Companies sell these bonds, which function as a kind of insurance. For a price, they will repay the amount of the old loan should anyone, at any point, come trying to collect on it.
How to Stay Out of Trouble
Just as a congregation should have a property inspection done to discover any hidden structural issues in their church building, they should also pull a preliminary title report to see if there are any hidden legal problems with their church property.
For assistance in clearing up any title issues, congregations can turn to DCG Strategies, who specializes in serving churches and provides assistance at every step of the property management, development, and sales process.