Determination of liabilities and warranties is dependent upon the unique facts of each individual transaction. The publisher of this website strongly encourages any reader who is contemplating a conveyance of property between closely related parties to contact our underwriters for specific title insurance requirements.
WHAT TYPE OF DEED TO USE
A frequently asked question is what type of deed should be used to convey title to or from a family limited partnership, a family trust, a closely held corporation, or between family members. Answers range from quit claim deeds to general warranty deeds, subject only to specifically enumerated title exceptions. Only the latter answer is correct for reasons hereafter discussed.
Several years ago an Arizona lawyer was sued by a former client who alleged that the lawyer malpracticed when he prepared and recommended to the client that a quit claim deed be used to transfer title from a closely held corporation to its shareholder. Both the shareholder and the closely held corporation were clients of the lawyer. The corporation was the named insured in a title insurance policy. Following the conveyance the shareholder did not obtain either a new title insurance policy insuring his title or an endorsement to the existing title insurance policy naming the shareholder as an additional insured.
Shortly after the recording of the quit claim deed from the corporation to the shareholder, a local public utility exercised its right under a recorded easement to construct a high voltage power line over the property. The shareholder checked the corporation's title insurance policy and found that the easement was not listed as a Schedule B exception in the policy. The shareholder made demand upon the title insurance company seeking reimbursement for the loss caused by the use of the easement by the public utility. The title insurance company quite properly advised the shareholder that because he was not an insured, he had no rights under the policy. On the other hand, the corporation, while the insured in the policy, no longer had title to the property and thus suffered no loss as a result of the utility exercising its easement rights. The shareholder then sued his former lawyer alleging that the lawyer's conduct fell below the standard of care when he advised the use of a quit claim deed from the corporation to the shareholder.
What could the lawyer have done to preserve the protection of the corporation's title insurance policy for the benefit of the shareholder following the transfer of the property from the corporation to the shareholder? First, he could have advised his client to purchase an endorsement to the corporation's title insurance policy adding the shareholder as a named insured. This would have provided title insurance protection to the shareholder for title risks that existed as of the date that the policy was issued to the corporation. Such endorsements may be obtained for a nominal charge, generally about a hundred dollars. The lawyer also could have recommended to the shareholder that he obtain a new policy of title insurance naming the shareholder as the insured, which would have provided title insurance protection through the date that the policy was issued. The premium for the new policy would have been substantially greater than the cost of the endorsement to the old policy.
Lastly, the lawyer could have prepared a general warranty deed from the corporation to the shareholder in which the corporation warranted title against all persons whomsoever and all matters whatsoever except those specifically enumerated title exceptions found in Part Two of Schedule B of the corporation's existing title insurance policy. Under this example, the shareholder could have then made a claim on the corporation and the corporation could have tendered the claim to its title insurer.
Almost all title insurance policies contain a provision defining the period during which the coverage afforded by the policy continues in force. The ALTA form of owner's policy of title insurance provides:
The coverage of this policy shall continue in force as of date of Policy in favor of an insured only so long as the insured retains an estate or interest in the land, or holds an indebtedness secured by a purchase money mortgage given by purchaser from the insured, or only so long as the insured shall have liability by reason of covenants of warranty made by the insured in any transfer or conveyance of the estate or interest. (Emphasis added)
Under this policy language, an insured retains the benefit of the title insurance policy after conveying an estate or interest in the land, as long as the insured has liability by reason of covenants of warranty made in the conveyancing instrument. If the grantee of an insured finds that the title is threatened or non-existent by reason of a forgery or other defect in the chain of title, or there is a lien or encumbrance against the title, he can then make a claim against his grantor under the warranties contained in the conveyancing instrument.
The only type of deed that creates "liability by reason of covenants of warranty" as to matters of record is a general warranty deed subject to specifically enumerated items. A quit claim deed contains no warranties and creates no "liability by reason of covenants of warranty". A warranty deed, whether special or general, that recites that it is "Subject to: Existing taxes, assessments, liens, encumbrances, covenants, conditions, restrictions, rights of way and easements of record" creates no "liability by reason of covenants of warranty" as to matters of record, which are generally the matters against which protection is provided by a standard owners policy of title insurance.
It is only a general warranty deed, subject only to specifically enumerated title exceptions that creates "liability by reason of covenants of warranty".
If the lawyer in the example discussed above had used the proper form of general warranty deed, he would have preserved the title insurance protection and would not have incurred liability to his former client.
* Timothy W. Barton, Esq. has been practicing law since 1963. He is an Arizona State Bar Certified Real Estate Specialist and is recognized in The Best Lawyers in America (Real Estate category).
By: Timothy W. Barton, Esq.