What Is a Title Defect?
A title defect is any issue, error, or encumbrance on a property title that could affect your ownership rights, your ability to use the land as intended, or your ability to secure finance. In New Zealand, title defects range from minor clerical errors to serious encumbrances that could render a property unsellable.
Common title defects include:
- Incorrect legal descriptions or boundary references
- Undischarged mortgages from previous owners
- Unregistered easements or rights of way not shown on the title
- Covenants restricting building, subdivision, or land use
- Caveats lodged by third parties claiming an interest
- Consent notices under Section 221 of the Resource Management Act
- Missing or outdated survey plans
Finding a defect during due diligence is not necessarily a deal-breaker — but ignoring one can be. Here is how to handle each scenario.
Step 1: Order a Comprehensive Title Search First
You cannot fix what you have not found. A basic Record of Title ($42.90) shows current ownership, registered interests, and encumbrances. But for due diligence, you need more:
- Record of Title with Diagram ($42.90) — confirms boundaries and area
- Guaranteed Search ($45.90) — provides state assurance, critical for settlement
- Historical Title ($42.90) — reveals past interests that may still apply
- Survey Plan ($49.90) — verifies boundary accuracy and easement locations
For the most thorough pre-purchase check, our Pre-Purchase Diligence Package ($189.90) bundles all of these together at a significant discount.
Step 2: Identify the Type of Defect
Not all defects carry the same risk. Understanding what you are dealing with determines your next move.
Low-Risk Defects
These are usually administrative and straightforward to resolve:
- Typographical errors in names, addresses, or legal descriptions
- Outdated references to former legislation (e.g., references to the Land Transfer Act 1952 instead of the 2017 Act)
- Redundant interests that are no longer in effect but were never formally discharged
Solution: Your solicitor can apply to the land registration authority to correct these. Most are resolved within days.
Medium-Risk Defects
These require negotiation with the vendor but are often resolvable:
- Undischarged mortgages — the vendor must discharge these at settlement
- Easements not disclosed in the sale documentation
- Covenants that restrict intended use (e.g., a covenant against subdividing when you plan to subdivide)
- Consent notices imposing ongoing conditions from a previous subdivision consent
Solution: Negotiate with the vendor. You can request that undischarged mortgages be cleared before settlement, ask for covenant variations, or adjust the purchase price to reflect the encumbrance.
High-Risk Defects
These can be deal-breakers or require significant legal work:
- Caveats claiming an interest in the property
- Restrictions on transfer preventing the sale from proceeding
- Unregistered interests that may override the registered title
- Conflicting boundary descriptions between the title and survey plan
- Heritage or conservation covenants that severely limit development
Solution: Seek immediate legal advice. A caveat can stop settlement entirely. Boundary conflicts may require a new survey and potentially a boundary adjustment application. Heritage covenants may be permanent and non-negotiable.
Step 3: Get Professional Advice Early
The moment you spot something unexpected on a title, involve your solicitor. Do not try to interpret complex legal language yourself. A Record of Title with Diagram costs $42.90 — but misinterpreting it can cost you tens of thousands.
Your solicitor will:
- Confirm whether the defect is genuine or a misunderstanding
- Advise on whether the defect is resolvable before settlement
- Draft conditions in the sale and purchase agreement to protect you
- Negotiate with the vendor's solicitor on your behalf
- Liaise with the land registration authority if corrections are needed
Step 4: Negotiate With the Vendor
If a defect is discovered during due diligence, you have several options:
- Request the vendor resolves the issue before settlement. This is the cleanest option. The vendor applies to discharge the old mortgage, remove the redundant interest, or correct the error. Settlement is conditional on the title being cleared.
- Negotiate a price reduction. If the defect cannot be resolved quickly (e.g., a covenant that restricts your intended subdivision), you may accept the title as-is but at a lower price reflecting the encumbrance.
- Make settlement conditional on resolution. Your solicitor inserts a clause: settlement is conditional on the vendor discharging the specified interest within a set timeframe.
- Walk away. If the defect is serious enough and the vendor will not or cannot resolve it, invoke the due diligence or title condition in your sale and purchase agreement to cancel the contract.
Step 5: Protect Yourself Before Making an Offer
The best way to handle a title defect is to find it before you commit. Here is what to do before making an offer:
- Include a title search condition in your sale and purchase agreement
- Order a Pre-Purchase Diligence Package to get the full picture
- Review the title with your solicitor before going unconditional
- Check for encumbrances, caveats, and covenants
When to Walk Away
Not every property with a title defect is worth the fight. Consider walking away if:
- The defect involves a caveat from a third party with a legitimate claim
- There are boundary disputes with neighbouring properties
- Restrictions on transfer prevent you from registering ownership
- The cost to resolve the defect exceeds the property's value to you
- The vendor refuses to cooperate with resolution
Walking away from a bad deal is always cheaper than litigating a title dispute after settlement.
Real-World Scenarios
Scenario 1: Undischarged Mortgage
Situation: A buyer finds a mortgage registered by the vendor's previous lender still showing on the title.
Action: The vendor's solicitor applies to discharge the mortgage. Settlement is delayed by 3–5 working days but proceeds normally. Cost to buyer: $0 (vendor pays).
Scenario 2: Undisclosed Easement
Situation: A right of way easement benefiting a neighbouring property was not disclosed in the marketing material.
Action: The buyer negotiates a $15,000 price reduction, acknowledging the easement reduces the usable section area. The title is accepted as-is.
Scenario 3: Restrictive Covenant Blocking Subdivision
Situation: A covenant prohibits further subdivision of the section, but the buyer planned to build two townhouses.
Action: After legal advice, the buyer learns the covenant can only be removed by application to the Environment Court — a process costing $20,000+ with no guarantee of success. The buyer walks away.
FAQ
Can a title defect be fixed after settlement?
Some defects can be resolved after settlement, but you lose leverage. Before settlement, the vendor is motivated to resolve issues to complete the sale. After settlement, you are on your own — and you may be stuck with encumbrances you did not anticipate. Always complete your pre-settlement title search checklist before going unconditional.
What is the difference between a caveat and a covenant?
A caveat is a legal notice lodged by someone claiming an interest in the property — it effectively freezes the title from further dealings until resolved. A covenant is a registered condition that restricts how the land can be used — it remains on the title permanently unless removed through a formal process. Both are important, but a caveat is usually more urgent.
Should I still buy a property with a title defect?
It depends on the defect. Minor administrative errors are easily fixed. Undischarged mortgages are routine at settlement. But restrictive covenants, caveats, and boundary disputes require careful assessment. Always get legal advice and factor the cost and risk of resolution into your purchase decision. A Guaranteed Search ($45.90) gives you the assurance you need before committing.
