Deeds, Warranties and Title Policies

Many don’t completely understand the different types of deeds that might be used when transferring real property. This includes the effect of a deed on the grantor as well as the grantee.

I’ve seen several instances where do-it-yourselfers have used quitclaim deeds improperly, not realizing the consequences of the decision. This is common, for example, with transfers to revocable living trusts. Sometimes a quitclaim deed is appropriate, but other times it’s not. Allow me to examine this issue today more thoroughly.

Title companies, for example, use quitclaim deeds quite frequently for intra-family transfers. Before signing a document that has not been prepared by or reviewed by an attorney, consider doing so. An attorney may or may not charge any more than a title company, but will better understand the legal ramifications of the proposed type of deed. Generally speaking, there are three different types: general warranty deed, special warranty deed and quitclaim deed.

In a general warranty deed, the grantor covenants that she has the ability to transfer the property, which is free from all claims and liens existing both during her ownership and before such time. The “warranty” refers to a guarantee on the condition of the property’s title. When used in conjunction with a title insurance policy, the grantee’s ownership interest is secured. The grantee has legal recourse against the title policy insurer against future claims on the property made by those having an interest prior to the transfer.

A special warranty deed is one in which the grantor only warrants or guarantees the title against defects in clear title that may have arisen during the period of her ownership of the property.

Unlike warranty deeds and special warranty deeds, quitclaim deeds do not contain any covenants or warranties, including whether the grantor owns any interest in the property at all. A quitclaim deed simply states that the grantor conveys whatever interest she has in the property to the grantee.

Consider an example where Dorothy purchases a property from Sophia. Dorothy obtains an owner’s title insurance policy that insures that the property is free of prior liens. The typical title insurance policy is not assignable, does not continue coverage for the transferor after these transfers (except for deed warranties) and does not include a transferee in its definition of “insured.”

Assume that Dorothy then conveys the property for consideration to an LLC, which she and several partners use to improve homes and resell them. Unbeknownst to Dorothy, Sophia has previously granted a mortgage to Blanche. After Sophia sells to Dorothy, but does not pay off Blanche’s lien, Blanche commences foreclosure proceedings.

This example is unusual in the sense that a normal title search should reveal the mortgage. The mortgage would be listed as an exception to the title policy and would have to be satisfied at closing. But for purposes of this example assume that the mortgage existed but was not previously discovered.

Upon notice of Blanche’s foreclosure proceedings, Dorothy and her LLC make a claim on the title insurance policy. Title policies usually contain a “Continuation of Coverage” provision stating, “the coverage shall continue in force in favor of an insured, but only so long as the insured shall have liability by reason of covenants of warranties in any transfer of the title.” Thus, the only way the policy that was issued to Dorothy provides any coverage for the LLC protecting it against loss resulting from Blanche’s foreclosure is if Dorothy retained liability when she transferred her property to her LLC.

If Dorothy transferred the property via quitclaim deed, she could have no liability to her LLC because a quitclaim deed does not contain any covenants or warranties. A quitclaim deed is the surest way to ensure that Dorothy’s title insurance coverage does not extend to a subsequent grantee. Quitclaim deeds, therefore, sometimes serve to sever the chain of responsibility that the title insurer has to the subsequent owners.

Do we achieve a different result with a special warranty deed? A special warranty deed provides warranties against defects that arose during Dorothy’s ownership of the property. Since Dorothy had nothing to do with Sophia’s mortgage to Blanche, she has made no warranties to the LLC about the mortgage. Thus, insurance coverage would not likely extend to the claim.

What if Dorothy conveyed under a general warranty deed? Here Dorothy covenants and warrants to the LLC that there are no prior liens against the property, before or after Dorothy held title. When Blanche commences foreclosure, the LLC has a claim against Dorothy for breach of warranty, and Dorothy can file a claim on her insurance policy for indemnification.

If one therefore intends to transfer property without obtaining a new policy of title insurance, one should carefully consider the type of deed to use, the risks attendant to the covenants and warranties in the actual deed used, and the language in any available title insurance policy.

The Sheppard Law Firm has its main in Fort Myers and also in Naples by appointment.

© 2017 Craig R. Hersch. Originally published in the Sanibel Island Sun.

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Craig R. Hersch

  • Senior Partner,
    • Sheppard Law Firm
  • Florida Bar Board Certified Estate Planning Attorney / CPA
  • Editorial Advisory Board Member,
    • Trusts & Estates Magazine
  • Founder & Board Member,
    • State Chartered Trust Company