The scene runs a little something like this: Your client calls you and says he is interested in buying a piece of property. He asks you to draft a purchase contract. You carefully do so and send it to the Seller's attorney for review. A few days (or maybe hours) later your beautifully crafted document is returned to you scarred beyond recognition. Among the hieroglyphics you notice that the word "general" preceding the term "'warranty deed" has been stricken and chicken scratched in its stead is the word "SPECIAL." Depending on how long you have been practicing, your reaction may range from indignation to indifference. You may say to yourself, "No way!" or you may simply shrug your shoulders as a sign that this is where the market has taken us.
Somewhere on the timeline of the last few to ten years the scenario I have described has become more and more the rule and less the exception. At some point sellers of real property and their attorneys have figured out that they can limit their liability and that they can sell such a position on the market. For many young real estate lawyers the Special Warranty Deed is as common as e-mail closings and cell phone conference calls. But, as many of your mentors may point out to you, there was a time not so long ago that the prudent real estate practitioner would rarely consider obtaining title for his client through the use of a special or limited warranty deed.
This article will address the distinct differences between the general and special warranty deeds and will give to you the reader the title insurance industry's perspective on this change in the convention of title conveyance. In addition, this article will attempt to provide some practical insight as to what you may want to consider when deciding whether or not to concede this point.
I. General Versus Special Warranty Deeds
Historically, the general warranty deed has been the most common form of conveyance and this article is in no way meant to imply that it is or should be viewed as obsolete. The requirement of conveyance by general warranty deed is still included in the language of many form contracts that are widely utilized (e.g. the North Carolina Bar Form Offer to Purchase and Contract and the North Carolina Board of Commercial Realtors Form Agreement for Purchase and Sale of Real Property). Clearly, the use of the general warranty deed should continue to be the preferred form of deed as it provides the buyer with the most protection.
The practical difference in the two types of warranty deeds may be best considered as one more of the scope of protection than of the kind of warranty. For a more detailed discussion of the nature of the covenants made in warranty deeds please refer to William A. Foley, III, Title Assurance (Published in North Carolina Lawyers Weekly, July 13, 1998).
The general warranty deed is distinguished from the special warranty deed in that it contains a guaranty from the grantor that title to the real property is superior to any person who makes a claim whether such person claims through the grantor or otherwise. Webster's Real Estate Law in North Carolina § 10-3 (5th ed.).i The special warranty deed provides only that the grantor has not done anything to impair title to the property during the period of his ownership and the warranty is limited to those claiming through the grantor. Webster's § 10-3 (5th ed.).ii
II. The Title Insurance Viewpoint
This section could just as easily be labeled "What makes our claims department nervous?" The real answer to that question is "Just about everything", but that is why they are claims people. Actually, the special warranty deed makes the industry nervous because of one very simple reason; the special warranty deed may eliminate the current policy issuer's ability to recover from the prior owner's title insurer.
Since the Seller's policy of title insurance excludes both defects "created, suffered, assumed or agreed to by the insured claimant" and "attaching or created subsequent to the Date of Policy" (See ALTA Owner's Policy, Exclusions from Coverage 3(a) & (d)), any matters for which the Seller might be liable due to a breach of the special warranty deed's covenants of title would be excluded from the coverage of the policy. The practical result is that while there may be a claim against the Seller, the deep pockets of his insurer may be sewn shut.
Thus, we as title insurers are asked to allow the Buyer (or more precisely, its counsel) to "tack" to Seller's Owner's Policy of Title Insurance, but in the event of a claim we are cut off from that policy as a source of recovery. For a detailed discussion of the limits and conditions to title insurance coverage please see Joyce D. Palomar, Title Insurance Law, § 8, et seq.
That being said, don't expect a rush in the industry to tell you that you must in all circumstances reject a special warranty deed. The market simply won't allow that type of rigorous position. You may, however, be asked the simple question of "Why?" Hopefully, you have already asked the same question and have received a comfortable answer.
Some insurers may make a general warranty deed a requirement in your commitment. Practically, this is ineffective due to the fact that the purchase contract has generally been signed prior to the application for a title insurance commitment and the parties have agreed to the form of deed. Also, in most transactions the conveyance instrument has already been recorded prior to the title insurer seeing it for the first time. The purpose of this discussion is merely to give the practicing attorney a cursory understanding of the reason an insurer may ask for a general warranty deed or ask why there is not one.
III. Negotiating Scenarios
Let's return now to our hypothetical contract negotiations. After digesting the multitude of comments from the Seller's attorney, a redraft seems appropriate. As you finish up your black-line, you turn to that most ingenious of all negotiating tools; the "do nothing, say nothing" approach. Thus, you leave the requirement for a general warranty deed to be utilized and shoot the revised contract to the Seller's counsel hoping that it will fly "nap of the earth" under his radar. But this is no ordinary lawyer. Seller's counsel has seen through your plan and is now holding on your phone to hammer out the last remaining details.
When he alerts you to the fact that you have not picked up on his deed comment, you reply that your client will insist on a general warranty deed. You bolster this argument with the fact that your preliminary title review indicates that the Seller received a general warranty deed and thus should be willing to deliver one. The Seller's attorney counter-punches though and states that he is unwilling to have his client guarantee title outside of his ownership and goes on to say that that is what you get title insurance for. Depending on whether the line at Starbuck's was excessively slow, he may even jab with "You are getting title insurance, aren't you?"
This is how the negotiation typically unfolds and it usually ends with acquiescence by the Buyer's counsel to accept a special warranty deed. After all, that title insurance argument is pretty compelling. And that is probably the reason that there has been at least a modest trend toward accepting the limited warranty as the "standard." But, the title insurance argument can work both ways. You can easily respond to this line of reasoning by saying that the Seller's title policy will continue to protect him for breaches of title warranties after the date of transfer. See ALTA Owner's Title Policy Section 2 of the Conditions and Stipulations. The point is that this concession should not be made purely based on the fact that the lawyer thinks it is an insignificant point. As discussed below, the lawyer should arrive at a decision to accept a special warranty deed through careful analysis.
Many real estate attorneys may take the view that the warranties in a deed are already limited for practical purposes due to the fact grantors back in the chain of title may be "judgment proof" for any number of reasons. The Seller may have been a single asset entity that is dissolved after the sale or the proceeds of the sale are scattered to the winds long before the breach of warranty claim surfaces. Also, this may be only one of many points that have to be worked out. I can assure you that when discussing these points with you client he will likely not know why (or care) why you are holding on to this piece of high ground. If you have thought it through and assessed the risk, then you can inform your client and let him tell you to move on.
Also, the relatively recent birth of title insurance as an integral part of real estate transactions has given the consumer and lawyer alike a new level of comfort. The title insurer has in fact agreed to insure the policyholder against loss resulting from encumbrances, whether recorded or unrecorded, which are not otherwise excluded from coverage. However, when faced with the decision of whether to accept a limited warranty deed, the prudent practitioner should at least be aware of certain basic concepts.
First, as a matter of due diligence, the insistence upon use of a special warranty deed to convey title, should cause the Buyer's attorney to ask the question "why"? Often the reply is simply, "because that is my client's company policy." Asking the question at a minimum means that the lawyer is thinking about the fact that there may be some more problematic reason for the Seller's insistence. Perhaps there is some matter that the Seller is aware of in the chain of title that either would be cause for the Buyer to walk away from the purchase or would be appropriate to address (and hopefully cure) during the Buyer's inspection period. Simply accepting the Seller's response without contemplating more sinister matters provides inadequate service to your client.
Second, all real estate attorneys should be aware that as I was informed in a seminar on the basics of title insurance, "Title Insurance is not a substitute for good lawyering." That is to say, even with title insurance coverage for your client, there exist some title matters that cause a loss to your client that is not covered under the policy. Every lawyer obtaining title insurance should carefully read the preprinted policy jacket in order to understand the limitations of title insurance coverage.
Understanding where accepting a special warranty deed versus insisting on a general warranty deed leaves you in the transactions landscape may allow you to head off a serious title problem for your client. At a minimum you will have an answer for the senior partner who asks if you are crazy for agreeing to such a thing. Just before he banishes you to an eternity as an associate, you can tell her that you have thought about the potential ramifications, assessed the relative importance of this one battle to the overall war of the transaction negotiations and made a well reasoned decision.
By now our diligent Buyer's attorney is staring at the last draft of the purchase agreement. By all accounts it has to go out for signature to the Seller (who is on vacation in Florida) by federal express. As he tries to decide whether or not to give in to the Seller's counsel's request, the stress lightens for a moment and a comfort washes over him like the Seller's Florida sunshine. Regardless of his decision, he has asked the right questions, fully informed his client and his favorite title underwriter of the situation and has taken all reasonable steps to avoid a worst case scenario. He now understands that they call it a "special" warranty deed for a reason.
The pertinent provision of the North Carolina Bar Association Form General Warranty Deed is as follows:
"And the Grantor covenants with the Grantee, that Grantor is seized of the premises in fee simple, has the right to convey the same in fee simple, that title is marketable and free and clear of all encumbrances, and that Grantor will warrant and defend the title against the lawful claims of all persons whomsoever except for the exceptions hereinafter stated."
N.C. Bar Assoc. Form No. 3 © 1977.
The North Carolina Bar Association Form Special Warranty Deed states as follows:
"And the Grantor covenants with the Grantee, that Grantor has done nothing to impair such title as Grantor received, and that Grantor will warrant and defend the title against the lawful claims of all persons claiming by, under or through Grantor except for the exceptions hereinafter stated."
N.C. Bar Assoc. Form No. 6 © 1977.