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Seller Beware: Understanding the General Warranty Deed

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Seller Beware: Understanding the General Warranty Deed Seller Beware Understanding the General Warranty Deed Rusty Adams Publication 2146 November 15, 2016 The sign reads, “FOR SALE BY OWNER.” The Takeaway A buyer calls, and an agreement is made to buy the prop- erty. The parties agree to leave the real estate brokers The general warranty deed is the most commonly and lawyers out of this. It’s a simple transaction. There’s used deed in Texas. It’s important for a seller to be no need to pay commissions and attorney fees. aware of the potential liabilities created when real property is conveyed by general warranty deed. “Of course, I will want a general warranty deed,” says Parties to real estate transactions can reduce their the buyer. The seller readily agrees. After all, the gen- risk by obtaining effective legal counsel and by eral warranty deed is what everyone uses. The contract purchasing title insurance. forms promulgated by the Texas Real Estate Commis- sion even require a general warranty deed. That’s how it’s done. left holding the bag. They are, of course, free to do so, The seller does a quick Internet search and finds a form and brokers and lawyers are not required. for a general warranty deed, quickly fills it out and signs Although the most common deed in use in real estate it, delivers it to the buyer in exchange for a check, and transactions is the general warranty deed, the parties to deposits the check. On the way home, the seller congrat- the transaction rarely know the legal ramifications of its ulates himself for saving money. Little thought is given use, especially when real estate professionals, lawyers, to the legal mumbo jumbo contained in the deed. and title companies are not consulted. Participants in This scenario plays out often all over Texas, and count- real estate transactions should know what it means to less buyers and sellers put themselves at risk of being sign (and accept) a general warranty deed. 1 Implied Warranties An encumbrance is any impediment to the title that does not change the ownership of the land, but that diminish- Generally speaking, a deed is an instrument that conveys es the value or use of the land. Examples include liens, an interest in property. While not all deeds contain tax assessments, leases, and easements. warranty language, certain warranties are implied in almost every deed. The Texas Property Code provides Note the similarities and differences in the implied and that any time the words “grant” or “convey” are used in express warranties. The implied warranty extends only a deed, the grantor (seller) promises 1) that the grantor to the immediate grantee and only says that the grantor has not transferred any part of the property to anyone has not previously conveyed the property to a third per- else, and 2) that the property is free from encumbrances son. The express warranty goes much further. It extends (Section 5.023). to all subsequent grantees and covers every potential defect in the title. The implied warranties are made only to the grantee (buyer) in the deed. That is, they are not attached to the A warranty does not strengthen or enlarge the title land. Only the immediate buyer may sue the grantor if conveyed. It does not even guarantee that the grantor the warranties are breached. owns the property. It simply promises to compensate the grantee in the case of a failure of title. Express Warranties Breach of Warranty of Title Express warranties are stated specifically in a deed. They are similar to implied warranties, but they give A breach of the warranty of title occurs when a third greater protection to the grantee and subsequent grant- party has a valid claim to the property—a failure of title. ees, and they expose the grantor to greater liability. For example: A general warranty deed contains a warranty that looks • The seller may have previously conveyed part or like this: all of the property to a third party. And grantor hereby binds grantor, grant- • A previous owner may have previously conveyed or’s heirs, executors, and administrators to part or all of the property to a third party. warrant and forever defend all and singular • A third party may have adversely possessed the the said premises unto the said grantee, his property prior to the date of the transfer of the heirs, and assigns, against every person property. whomsoever, lawfully claiming or to claim • A third party may have obtained title through a the same, or any part thereof. separate chain of title. What does this mean? It means that the seller is guaran- A failure of title may be total or partial. A total failure teeing to compensate the buyer for any failure of title, of title occurs when no interest in the property passes all the way back to the time of the land patent from the to the grantee as a result of the deed. A partial failure sovereign. In Texas, that means the original grant from occurs when only part of the property interest passes to Spain, Mexico, the Republic of Texas, or the State of the grantee. Texas. Additionally, this warranty is appurtenant to the land, meaning that it is attached to the land and “runs In the event of a total failure of title, damages are the with” the land. In other words, the seller’s guarantee is purchase price paid the grantor, with interest. made to the buyer and to all subsequent grantees, and In the event of a partial failure, the damages depend on includes all title defects, even if the seller had nothing to the circumstances. If title fails as to a certain part of the do with them and had no knowledge of them, and even land, then the damages are calculated by determining the if they originated over 180 years ago. value of the part to which title fails in proportion to the When a general warranty deed is given, the grantor value of the entire tract, and then multiplying the result- promises that 1) the grantor will defend and protect the ing fraction by the purchase price. grantee against the rightful claims of third parties to the If title fails as to an undivided interest, damages are cal- property (warranty of title), and 2) the property is free of culated by dividing the price paid to the grantor for the encumbrances (covenant against encumbrances). entire tract by the number of acres in the entire tract at 2 the time of the conveyance to obtain a price per acre and The effect of this warranty is that the seller is liable then multiplying by the percentage of undivided interest only for claims that arise through him. Of course, this for which title failed, unless the value of the failed inter- shifts the risk to the buyer should some other failure est is affected because it is an undivided interest. of title occur, so a buyer may be reluctant to accept a special warranty deed. Another type of deed, called a If the grantee obtains full title by purchasing the out- deed without warranty, eliminates the express warranties standing interest from a third party who is the lawful altogether. Implied warranties still exist unless the deed owner, the buyer may recover the price paid for the expressly disclaims them. Deeds without warranty are outstanding interest, but these damages are capped at the uncommon in real estate sales. price paid to the grantor for the entire tract. Usually, a deed has a section entitled, “Exceptions to A grantee may also recover other costs, taxes paid, and Conveyance and Warranty.” Known and existing encum- attorney fees. brances are listed here and specifically excluded from Breach of Covenant Against Encumbrances the warranties made in the deed. Encumbrances include liens and tax assessments. Ease- Title Insurance. A real estate broker or salesperson is ments or restrictions on use may also be encumbrances. required to advise each buyer that the buyer should 1) However, easements and restrictions are often excepted have the abstract of title examined by the buyer’s attor- from the warranty. ney, or 2) obtain a title insurance policy. Buyers would do well to listen to this advice. An example of a breach of the covenant against en- cumbrances is the existence of a lien on the property. Title insurance may be purchased to protect the buyer The breach technically occurs at the time the covenant from defects and encumbrances. When purchasing title is made. However, the buyer may not sue until 1) the insurance, it is important to remember a few things. lienholder forecloses and takes the property from the First, even though the title policy is often paid for by buyer, or 2) the buyer pays to discharge the lien. In this the seller, title insurance typically protects the buyer (an event, the grantor may be sued for the cost necessary to owner’s policy) or the lender, if any (a loan policy). The discharge the lien or encumbrance. buyer (or lender) is the insured, and if a valid claim is If the breach is based on an impediment, such as an made, the insured gets paid. This is much better for the easement or restriction, the damages are the difference insured than suing for breach of warranty. After all, the in the value of the property without the impediment and seller could be nowhere to be found or judgment-proof the value of the property with the impediment. These (broke). values are calculated at the time of the transfer of the No legal protection is provided to the seller.
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