Chapter: What type of deed offers the MOST protection to the grantee (buyer)? (EN)

Chapter: What type of deed offers the MOST protection to the grantee (buyer)? (EN)

Understanding Deeds and Conveyance of Title

• A deed is a legal instrument that transfers ownership of real property from one party (the grantor) to another (the grantee). The degree of protection a deed offers to the grantee depends on the warranties and covenants contained within the deed. The strength of these warranties dictates the grantee’s recourse in the event of title defects or encumbrances.

• Title: Title refers to the legal right to own, possess, and use property. A ‘clear’ or ‘marketable’ title is one free from reasonable doubt, liens, or other encumbrances that could adversely affect the property’s value or the owner’s ability to sell it.

• Encumbrance: An encumbrance is a claim against a property by someone other than the owner. Common examples include mortgages, liens (tax, mechanic’s), easements, and restrictive covenants.

Types of Deeds and Their Associated Warranties

1. General Warranty Deed:

   • Definition: A general warranty deed offers the highest level of protection to the grantee. It contains covenants that warrant against defects in title occurring at any time in the past, not just during the grantor’s ownership. This provides the greatest assurance of clear title.

   • Covenants (Warranties): The following six covenants are typically included in a general warranty deed:

     • Covenant of Seisin: Grantor warrants they own the estate they purport to convey. Mathematically, let T represent the total bundle of property rights associated with fee simple ownership. The grantor warrants T is fully vested in them.
     • Covenant of Right to Convey: Grantor warrants they have the legal right to transfer title. This is tied to seisin; if the grantor owns the property, they have the right to convey it.
     • Covenant Against Encumbrances: Grantor warrants the property is free from encumbrances (liens, easements, etc.) unless specifically stated in the deed. We can represent the total value of encumbrances as E. Ideally, E = 0. The grantor is warranting E is either 0 or the stated value.
     • Covenant of Quiet Enjoyment: Grantor warrants the grantee will not be disturbed in their possession or enjoyment of the property by a third party with a superior claim to title. Mathematically, if C represents a claim from a third party, the grantor warrants that P(C), the probability of a successful claim against the grantee’s enjoyment, is minimized.
     • Covenant of Warranty: Grantor warrants they will defend the grantee’s title against all lawful claims of persons whomsoever. This is a future covenant.
     • Covenant of Further Assurances: Grantor promises to execute any further documents necessary to perfect the grantee’s title in the future.

   • Grantor Liability: If a breach of any of these covenants occurs, the grantor is liable to the grantee for damages. This liability extends to title defects arising from the actions of previous owners.

   • Example: Suppose a buyer (grantee) purchases property with a general warranty deed. Years later, it’s discovered that a previous owner fraudulently obtained title. The current owner (grantee) can sue the original grantor of the warranty deed, even though the grantor wasn’t involved in the fraud. The grantor is liable because the warranty covers defects in title arising at any time in the past.

2. Special Warranty Deed (Limited Warranty Deed):

   • Definition: A special warranty deed provides less protection than a general warranty deed. The grantor warrants only against defects in title that arose during their period of ownership. They do not warrant against defects arising before they owned the property.

   • Covenants (Warranties): The grantor makes the same six covenants as in a general warranty deed, but the warranty is limited to claims arising by, through, or under the grantor.

     • Modified Covenant Against Encumbrances: The grantor warrants E = 0 specifically due to actions during their ownership. If an encumbrance pre-dates their ownership, there is no breach.

   • Grantor Liability: The grantor is only liable for defects created during their tenure. If a title defect stems from a prior owner, the grantee has no recourse against the current grantor under the special warranty deed.

   • Example: A buyer (grantee) receives a special warranty deed. It’s discovered that a previous owner (before the grantor) had an unpaid tax lien on the property. The buyer has no claim against the grantor of the special warranty deed, as the defect did not arise during the grantor’s ownership.

3. Bargain and Sale Deed:

   • Definition: A bargain and sale deed implies that the grantor holds title to the property, but it offers no warranties as to the title’s quality. The grantor is simply conveying whatever interest they possess. Some states require a bargain and sale deed to explicitly state that the grantor offers no warranties.

   • Covenants (Warranties): Typically, no warranties are made.

   • Grantor Liability: The grantor is not liable for any defects in title, even if they knew about them at the time of the conveyance.

   • Example: A bank selling foreclosed property often uses a bargain and sale deed. They are primarily interested in conveying whatever interest they obtained through the foreclosure process and are unwilling to provide any warranties.

4. Quitclaim Deed:

   • Definition: A quitclaim deed offers the least protection to the grantee. It conveys whatever interest the grantor may have in the property, without any warranty whatsoever. It doesn’t even imply that the grantor has any interest to convey.

   • Covenants (Warranties): No warranties are provided.

   • Grantor Liability: The grantor has no liability, even if they have no ownership interest in the property.

   • Example: Quitclaim deeds are often used to clear up potential clouds on the title, such as when someone needs to relinquish any possible interest in a property due to a divorce or inheritance situation. If someone uses a quitclaim deed to give up their purported interest in a property and it later turns out they never had any interest in the first place, the grantee has no recourse.

Title Insurance: Mitigating Risk

• Regardless of the type of deed received, obtaining title insurance is crucial. Title insurance protects the grantee (and the lender) from financial loss due to title defects, such as liens, encumbrances, or fraudulent conveyances.

• Title Search: Before issuing a title insurance policy, the title company conducts a thorough search of public records to identify any potential title defects.

• Policy Coverage: The title insurance policy covers the insured party for losses incurred as a result of covered title defects that existed at the time the policy was issued, up to the policy limits.

• Importance: Title insurance provides a separate layer of protection, independent of the warranties (or lack thereof) provided by the deed. It mitigates the risk of undiscovered title issues that could lead to financial loss.

Comparative Analysis & Mathematical Representation of Protection

We can think of deed protection in terms of risk mitigation for the grantee. Let R represent the total risk of title defects. We can assess the effectiveness of different deeds in reducing this risk.

• General Warranty Deed: R is minimized due to the broad warranties covering all past defects.
• Special Warranty Deed: R is reduced to the risk of defects arising solely during the grantor’s ownership. Let R_G represent the risk during the grantor’s period of ownership. The risk to the grantee is approximately R_G where R_G < R.
• Bargain and Sale Deed: R remains largely unchanged, relying heavily on the grantee’s own due diligence.
• Quitclaim Deed: R is potentially maximized, as the grantee receives no assurances about the quality of the title.

If we assume Title Insurance covers a portion of the remaining risk, let T be the portion of risk covered by Title Insurance. We can then rewrite our risk representation.
* General Warranty Deed + Title Insurance: R - T. (Close to zero, depending on title coverage).
* Special Warranty Deed + Title Insurance: R_G - T.
* Bargain and Sale Deed + Title Insurance: R - T.
* Quitclaim Deed + Title Insurance: R - T.

Conclusion

While title insurance is critical, the deed itself provides the first line of defense against title problems. The general warranty deed offers the most protection to the grantee because it warrants against defects in title arising at any time in the past, providing the strongest assurance of a clear and marketable title. However, a prudent buyer will always obtain title insurance, irrespective of the type of deed received, to provide an additional layer of protection against hidden or undiscovered title defects.