Equitable Title

Equitable title and legal title are like two parts to a complete title. Equitable title gives an entity beneficial interest in the property or the full use and enjoyment of the property. Legal title provides enforceable legal ownership in court. Legal title is commonly used as collateral when there is debt on a property.

When a loan is secured through a mortgage, either the borrower maintains legal title and the lender places a mortgage lien on the property (lien theory states) or the lender takes legal title, while the borrower has equitable title (title theory states). If the borrower is in default, with a mortgage the lender has to go through the courts to foreclose. When the loan is secured through a deed of trust, legal title is given to a neutral third party, or trustee, and the lender can usually foreclose on the property without going to court.

Putting ‘Equitable Title’ in Context

Riverbend Capital Partners, a private equity firm, is acquiring Upstate Market Plaza, a 68,500-square-foot grocery-anchored retail center located in the suburbs of Syracuse, New York. The center is anchored by a regional grocery store and includes several other tenants, such as a pharmacy, a coffee shop, and a gym. The acquisition aligns with Riverbend’s core-plus strategy, where the firm invests in stabilized properties that offer modest value-add opportunities.

To finance the acquisition, Riverbend secures a loan from a local bank, using a mortgage. In New York, which is a lien theory state, Riverbend retains legal title to the property while the lender places a lien on the property as collateral for the loan. At the same time, Riverbend holds equitable title, which gives them the beneficial interest in the property—meaning they have the right to enjoy the full use and income from Upstate Market Plaza, such as collecting rent from tenants and managing the property.

In this situation, while Riverbend has both equitable and legal title, the lender’s lien on the property gives them a security interest. If Riverbend defaults on the loan, the lender would have to go through the courts to initiate a foreclosure process to claim legal ownership of the property. This judicial foreclosure process can be time-consuming and costly, but it is a common process in states like New York.

As Riverbend manages Upstate Market Plaza, the equitable title allows them to handle day-to-day operations, lease negotiations, and improvements to the property, while the lender maintains a level of protection through the mortgage lien. If Riverbend successfully repays the loan, the lien is released, and they maintain unencumbered legal and equitable ownership of the property.

In this example, equitable title illustrates how Riverbend benefits from the property’s use and income, while the lender’s legal protection remains intact through the mortgage lien during the life of the loan.