Why Special Warranty Deeds Aren’t that Special
It is common for a real estate purchaser to complete or accept a purchase agreement form without paying much attention to the seller’s obligation to execute and deliver a deed. Often, a seller will agree to execute and deliver only a special or limited warranty deed, and many purchasers assume that a “special” warranty deed must be as good as or better than any other deed. The attorneys in our law office have often heard purchasers tell us that they assumed a “special” warranty deed is called “special,” because it is the best type of deed available. Unfortunately, that is not the case, and a purchaser is accepting a certain degree of risk by accepting a special warranty deed, rather than a warranty deed. In other words, there is nothing special about a special warranty deed, if you are the buyer.
In other articles, we have explained the basics of deeds, and the differences between a warranty, quitclaim, and special or limited deed. As a summary, here are the essential differences-
- Warranty Deed– Transfers title of real property with promises (warrants and guarantees) that the grantor holds legal title.
- Quitclaim Deed– Transfers only those interests in the real property actually held by the grantor with no promises that anything is being transferred.
- Special (Limited) Warranty Deed– Transfers legal title but limits the seller’s warrants or guarantees. The grantor is only guaranteeing the title against defects that arose during the period of grantor’s ownership of the property.
So, the quitclaim deed comes with no promises. The warranty deed comes with complete promises as to title. And the special warranty deed comes with limited promises. By signing a special warranty deed, the grantor is making no warranty or promises against defects existing before the time of grantor’s ownership.
What’s the Big Deal?
Many real estate investor, especially those who buy and sell properties frequently, often assume that it matters very little whether the grantor provides a special warranty or warranty deed. Most investors rely on the title report and title insurance, and assume that any title defect will be covered by the insurance. However, a special warranty deed can pose real risks to a grantee-buyer, particularly if the amount of title insurance coverage is less than the future value of the property. Take this true story as an example-
Bill the investor buys a commercial building on land contract and puts down 25% of the purchase price. Bill closes without title insurance, but he does record his land contract. After investing $80,000 in rehab improvements, the value of the property soars. Bill decides to get a cash-out mortgage loan, in order to pull out cash for his next purchase. Bill contacts Sally, his seller, to arrange a closing, at which Bill plans to pay off the land contract balance. Of course, Bill’s lender wants a first position mortgage and orders title work.
When the title report comes back, it is discovered that Sally obtained title from her seller through a Special Warranty Deed, but there is a title defect that predates Sally’s deed. In other words, Sally cannot deliver clear title to Bill.
When Sally bought the property, she purchased with $32,000 of title insurance. Even if Sally’s title insurer pays the $32,000 to cover Bill’s claims against Sally, Bill would have to sue Sally and collect his judgment award from Sally’s other income and assets. There is not enough title insurance money to cover Bill’s claims, and Sally may not have an enforceable claim against her seller, because Sally accepted a Special Warranty Deed. If the title defect predates Sally’s seller’s ownership, Sally has no recourse, which, in turn, limits Bill’s chances of a full recovery. So, by Sally accepting a Special Warranty Deed, both Sally and Bill have been harmed.
What’s the Norm?
In commercial transactions, it is standard practice and custom for title to be transferred by Special Warranty Deed. In fact, it is common to see a Special Warranty Deed, and rare to see a Quitclaim or Warranty Deed in a commercial transaction or a transfer by a corporation or limited liability company. Most often, the title insurer or lender will require/permit a Special Warranty Deed.
In a typical single-family home or condo purchase for consumer purposes, a Warranty Deed will be used.
Almost every deed contains the following exceptions-
subject to (i) all easements, highways, rights-of-way, covenants, conditions, restrictions and other matters of record; (ii) all current, non-delinquent real estate taxes and assessments; (iii) all matters that have been disclosed by a survey, and (iv) all matters that could be discovered by a physical inspection of said real estate.
Even a warranty deed will contain similar exceptions. This means that the grantor is not, for example, promising that the grantee is free from paying future real property taxes, or that there are no zoning restrictions, easements or a neighborhood covenant. Consequently, while a warranty deed is broad in the scope of warranties that the grantor provides, a warranty deed is not the only instrument that a grantee-buyer should request as part of a purchase. For example, a purchaser should request that the seller (vendor) provide a Vendor’s Affidavit, which is a document containing a long list of promises made by the seller about the condition of the property. Please read our other articles to learn more.
What Should Sellers Do?
If you are transferring property to another person, try to limit your liability by selecting the right type of deed. Obviously, must buyers will not accept a quitclaim deed, but a seller should try to negotiate the use of a special warranty deed, rather than a full warranty deed.
Here is an important note- the time to decide on the type of deed you will require from your seller or are willing to give to your buyer is when the purchase agreement or land contract is being negotiated. The purchase agreement or land contract should identify the precise type of deed required of the seller. The term “Warranty Deed” must be in the purchase agreement or land contract in order to compel the seller to execute and deliver a Warranty Deed. Conversely, a buyer cannot demand a Warranty Deed, if the purchase agreement contains the term “Special Warranty Deed.”
If you do not fully appreciate the legal impact of the documents you are signing, you should seek guidance from an experienced and knowledgeable real estate attorney.
Special Warranty Deed form available for purchase. See sample here.