Title assurance and the transfer of property
The origin and assignment of property rights is a necessary first step for promoting exchange. The process of exchange then conveys the rights of ownership to subsequent owners, including the right of future disposition.
However, a potential impediment to transactions is uncertainty about ownership. For example, the potential for theft, fraudulent transfer or error in recording ownership of the property creates the possibility of a break in the chain of title, in which case the ‘owner’ and the ‘possessor’ will not be the same person. As a result, a possessor who acquired the property in a legitimate transfer may find his or her rights of ownership challenged by a previously defrauded owner. In that case, the law of property must decide whom to favour: the last rightful owner, or the current possessor. Legal rules for establishing and assuring title provide the answer to this question (Baird and Jackson, 1984).Possession versus public recording of title
In a world of uncertainty, there are two methods for assuring title. One is simply to vest title in the possessor of a piece of property. The benefit of this type of system is that the cost of verifying title is low since a would-be purchaser need not be concerned with the sequence of transactions by which the current possessor acquired the property - the fact of possession itself assures title. The cost is that owners are at risk of losing their property without their consent, as by theft, thus encouraging unproductive investment in security and, in the case of land, discouraging productive investment in improvements.
The other system for assuring title to a piece of property is a public record that records all legitimate transactions involving the property. Thus any would-be purchaser can, in theory, trace the ownership of the property back to the point where it was first transformed into private property.
Searching the title record thus assures the purchaser that he or she is dealing with the legitimate owner and that no claimants will subsequently appear to challenge his or her ownership. In this way, it protects owners from non-consensual loss of title and discourages theft, since a wrongfully displaced owner can reclaim title.A recording system is costly to administer, however, making it impractical for most types of property. The efficient system, therefore, balances the risk of involuntary transfer under a possession-based system against the cost of verifying ownership via a public record. In view of this tradeoff, a recording system is comparatively better for property that is valuable, not transferred often, relatively immobile or easy to identify, and when the ability to divide or share ownership of the property is valuable (Baird and Jackson, 1984). Real property is the paradigmatic example of this type of property. (The Statute of Frauds, which requires written rather than oral contracts for the transfer of land, represents the contractual counterpart to the recording system: Friedman, 1985, p. 278.)
In contrast, a possession-based system is preferred for property that is frequently transferred and not easily described or identified. The classic example is money. Most forms of personal property are intermediate between land and money and therefore could conceivably be protected by a filing system. Thus, when personal property is sufficiently valuable (cars, for example), a recording system is cost justified.
An interesting combination of recording and possession systems for land is the Torrens registration system, under which the government, following a title investigation, certifies the owner’s title against any future claims (Janczyk, 1977; Shick and Plotkin, 1978). Legitimate claimants therefore cannot seek recovery of the land but only compensation out of a government fund financed by registration fees. In contrast, owners typically purchase private title insurance under a recording system to protect against the risk of losing their property to a legitimate claimant.
(See Miceli and Sirmans, 1995a, and Miceli et al., 2002 for a comparison of the Torrens and recording systems.) Land registration has succeeded in England, but it has not been widely used in the United States (Cribbet, 1975; Friedman, 1985, p. 434; Bostick, 1987).Title protection and economic development
Several economic studies have examined the link between formal title protection and economic development. De Soto (2000), for example, has claimed that the lack of a government-backed title system in most developing countries accounts for their failure to match the economic growth of Western market economies. Empirical evidence largely supports the hypothesis that formal title enhances land value and promotes investment (Besley, 1995; Alston, et al., 1996; Miceli et al., 2001a).
Involuntary transfers: adverse possession
The foregoing has emphasized the role of title assurance in promoting efficient exchange of property. In general, this involved removal of impediments to voluntary exchange such as uncertain ownership. The discussion of property rules versus liability rules, however, suggested that, in some cases, efficiency may be better promoted through involuntary exchange. This is true when the transaction costs of voluntary exchange are so high that otherwise efficient transactions are forgone. For example, the doctrine of adverse possession provides a means whereby a trespasser can acquire title without the owner’s consent by occupying the land continuously for a statutorily determined period of time (usually ten or more years). In effect, adverse possession places a time limit on an owner’s right to exclude trespassers from his or her property. It thus represents a ‘time-limited property rule’ (Miceli and Sirmans, 1995b).
The economic benefits generally attributed to adverse possession are twofold. First, it clears title to land after passage of the statutory period, thereby lowering the costs to would-be purchasers of discovering the legitimate titleholder and removing the risk of a future claim (Epstein, 1986; Merrill, 1986b; Netter et al.
1986). Second, adverse possession prevents land from being left idle for long periods of time. One should be cautious, however, in invoking these justifications, first, because modern land records are ordinarily easily accessible to would-be buyers and, second, because land left idle is not necessarily being used inefficiently, given the option value of future development.A more satisfactory explanation for adverse possession is that it minimizes the costs of boundary errors, which are the principal source of claims. If we suppose that an encroacher’s valuation of the mistakenly occupied land grows over time, a rule that awards title to the occupier after a certain period of time limits the loss that he or she would have to endure if expelled (Stake, 1995). Offsetting this is the risk that setting the statutory period too short would encourage intentional encroachment. The optimal statutory period thus balances these two effects (Ellickson, 1986; Miceli and Sirmans, 1995b; Baker et al., 2001).