Illinois Association of Defense Trial Counsel Springfield, Illinois | www.iadtc.org | 800-232-0169 IDC Quarterly | Volume 17, Number 3 (17.3.35)

Property Insurance

By: Larry N. Woodard Robbins, Salomon & Patt, Ltd. Chicago

Is it a Dirty ? The Argument for Using Special Warranty

In most residential transactions, the standard and widely accepted means of conveyance is by a general warranty deed, as defined in Section 9 of the Illinois Conveyance Act, 765 ILCS 5/1, et seq. (the Act). The operational words indicating a general warranty deed is that the grantor “conveys and warrants” to the grantee. To convey fee title in a residential transaction through any other means would likely be met with great resistance from the buyer’s attorney—or so conventional wisdom dictates. In commercial transactions, where all legal terms of the transaction are usually considered more bargained-for, the typical conveyance vehicle is the special warranty deed. Although not specifically entitled or defined as a “special warranty deed,” the concept of a deed in which the grantee receives warranties from the grantor only for done or suffered by the grantor or claims through the grantor’s interest, is codified in Section 8 of the Act. Granting title through a special warranty deed commonly uses a derivation of the words “,” “bargain,” “sell,” “alien” or “convey.” If the transaction in question is not an arm’s length transaction between unfamiliar parties, such as a conveyance for estate purposes, a conveyance pursuant to a divorce decree or adding or removing parties to title, the predominant method of conveyance is the . Under Section 10 of the Act, a quitclaim deed is a means to convey title without any implied warranties from the grantor. The operative words in a quitclaim deed indicate that the grantor will “convey and quitclaim” property to the grantee. Quitclaim deeds include deeds from sheriffs, land trusts, bankruptcy trusts and executors of estates. Conveying title through warranty, special warranty or quitclaim deeds bestows upon the grantee varying degrees of warranties of title from the grantor. The quality and quantity of seller’s warranties in sale are hotly contested issues in negotiations. However, these implied warranties in deeds are often overlooked. The type of deed and the corresponding warranties of title provided through the various means of conveying title should be included or excluded, depending on the situation and the party in interest. In most instances, as noted in the examples below, the use of the general warranty deed provides over-reaching warranties of title that the grantor has neither the breadth of knowledge to confirm nor the resources to defend and enforce. Likewise, the use of a quitclaim deed devoid of warranties from the grantor provides no protection to a grantee for instances when warranties from the grantor should be provided. The solution to over-warranting or under-warranting the implied warranties in a deed of conveyance is the use of the special warranty deed, as demonstrated in the following examples.

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Unintended Subrogation: Midfirst Bank v. Abney

In Midfirst Bank v. Abney, 365 Ill. App. 3d 636, 850 N.E.2d 373 (2nd Dist. 2006), the seller of knew of but failed to disclose to the purchaser a recorded mortgage that was not revealed on a title commitment or title policy. The property was sold to Rodney Abney via a general warranty deed. Subsequently, Abney discovered the recorded mortgage. Abney and his mortgage company filed suit against the title company and the seller, David Forshay. The title company paid on the claim and then sought subrogation from Forshay pursuant to the implied warranties attendant to the general warranty deed conveying the property. The Midfirst Bank court held that the title company could recover the amounts paid to Abney from Forshay because he had warranted in the general warranty deed that there were no encumbrances other than those of record. The Midfirst Bank decision is significant in that Forshay did not create the of the unknown mortgage at the time he owned the property prior to selling to Abney. Forshay purchased the property in a foreclosure sale via sheriff’s deed. The encumbrance in question had been recorded against the property two owners prior to Forshay and Forshay knew about the encumbrance. However, the Midfirst Bank court construed the warranties in the warranty deed that the property be free from all encumbrances. If Forshay had used a special warranty deed, he would only be warranting the property for the encumbrances placed on the property while he owned it, regardless of his knowledge. A seller of real estate in Illinois has no obligation to disclose to a buyer the documents of record for the subject parcel. Collini v. Heller & Co., 78 Ill. App. 2d 298, 223 N.E.2d 186 (1st Dist. 1966). The title company would arguably have had no subrogation rights against Forshay if the property had been conveyed by any instrument other than a general warranty deed.

When “Special Warranties” are Needed

There are situations where quitclaim deeds are a common and acceptable means to convey title. Such situations include estate planning where a party who is also the trustor is conveying property into a trust. Other instances are when a person gets married and wants to add his or her spouse to the title and perhaps add a right of survivorship for estate planning. In these instances, the person conveying title and the person or entity receiving title have some commonality of interest and do not need warranties of title. Put another way, a person is conveying property to himself or another incarnation of himself. However, if a situation arises where persons may be adverse to one another or have divergent interests, a simple quitclaim deed may not offer sufficient protection for the grantee. These scenarios, often seen in divorce settings, may require the warranties of title afforded through a special warranty deed in order to adequately protect the property’s recipient. For example, pursuant to a divorce decree, a husband and wife will sell their primary residence, and the husband will convey to his wife the cabin in Wisconsin that they now both own in joint tenancy. A few days before the husband and wife are to effectuate the divorce decree, the husband asks his friend for a loan in exchange for the equity in the Wisconsin cabin. Since the friend trusts the husband, formalities such as actual ownership of the cabin are not addressed, and the husband’s friend places a second mortgage on the cabin. A few days later, the husband conveys the cabin to the wife via a quitclaim deed. Since no would have revealed the new mortgage and the husband used a quitclaim deed, he is warranting nothing. Violation of divorce decree issues aside, by using a special warranty deed to convey property from one divorcing spouse to another, an attorney can protect his client and offset any unknown actions of a feuding spouse.

Page 2 of 3 For Value – The Quitclaim Deed Misconception

Some credit the proliferation of the use of the quitclaim deed to a misconception that only a quitclaim deed requires no transfer stamps and that a warranty deed always does. Both generalizations are incorrect. Most governmental entities and large corporations only convey property through quitclaim deeds for large amounts of consideration. Likewise, a warranty deed or special warranty deed can convey property for no value, which pursuant to most transfer tax rules, is an exempt transfer requiring no transfer stamps. Whether a conveyance of property is subject to transfer taxes is determined by whether there is consideration rather than the type of deed used to convey the interest. Mount v. Dusing, 414 Ill. 361, 111 N.E.2d 502 (1953). In determining the value of the transfer, Section 31-5 of the Illinois Transfer Tax defines value as “the amount of the full actual consideration for the real property or the beneficial interest in real property located in Illinois, including the amount of any on the real property assumed by the transferee.”

Managing Risk Through the Type of Deed

By providing a general warranty deed where the grantor warrants that there have never been any encumbrances on title, or by conveying through a quitclaim deed that gives title, but nothing more, the grantor or grantee may be exposed to an excessive amount of risk. The next time a client executes a general warranty deed, think of Mr. Forshay in the Midfirst Bank case and ask the client if he or she has complete and accurate knowledge of all encumbrances affecting the property for the last 150 years. The title company should be held to the accuracy of its title search, and if some encumbrance is missed, it should be the title company, and not the grantor giving the general warranty deed, that should be responsible. Accordingly, if an attorney represents a person receiving title from a party via quitclaim deed, can the attorney counsel his or her client to simply trust that the grantor has not done anything to cloud title? The grantor of property should be accountable for the matters of title, but only for the period the grantor held title. The special warranty deed accomplishes this balancing of risks.

About the Author Larry N. Woodard is a partner with Robbins, Salomon & Patt, Ltd., in Chicago, Illinois where he concentrates in all aspects of real estate law. He received his undergraduate degree with distinction from the University of Illinois at Urbana-Champaign and both his J.D. and his LL.M. in real estate law from the John Marshall Law School. He is a member of the real property sections of the American and Illinois Bar Associations as well as the real property section and law subcommittee of the Chicago Bar Association.

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