Deed Warranties: Why Quit Claim Deeds Can be Problematic
In North Carolina real estate transactions, there are three (3) basic forms of deed which are used commonly: General Warranty Deeds, Special Warranty Deeds, and Quit Claim Deeds (Non-Warranty Deeds). Each form of deed defines the scope of recourse and recovery purchasers may have against their sellers based on a claim of defective title.
A General Warranty Deed is the most common deed form used residential real estate closings. In conveying title by General Warranty Deed, sellers of property basically warrant – or guarantee – to the purchasers of property that the sellers have the right to sell the property and that the title is free from defects. The guarantees contained in the General Warranty Deed provide a type of protection for purchasers against title defects extending from a period of time well before the sellers actually acquired the property. As the General Warranty Deed provides the best protection of purchasers’ interests in real estate transactions, it is easy to see why public policy favors the use of General Warranty Deeds - and why these deeds are used in the standard Offers to Purchase and Contract.
There are certain transactions in which sellers will seek to limit their liability against title defects which may exist, but of which the sellers may have no knowledge. In these circumstances, the sellers will usually insist on conveying title by Special Warranty Deed. The warranties – or guarantees – sellers make through a Special Warranty Deed are limited to acts taken by those particular sellers which have affected the property. Sellers would not be liable to purchasers for any title defect which existed prior to the sellers’ ownership if the warranties are limited by a Special Warranty Deed. Banks which acquired title to property through foreclosure or heirs who acquired property through an estate likely will not know the history of the property they have come to own and, therefore, will seek to limit their liability to title defects. The Special Warranty Deed is used for that purpose. Additionally, many corporations convey real property by Special Warranty Deed so that any title matters arising before the corporations acquired the property do not result in liability which may affect other corporate assets.
The Quit Claim Deed (or Non-Warranty Deed) is a third deed form that is used in real property transactions – perhaps too often. Sellers conveying title by Quit Claim Deed provide no warranties or guarantees to purchasers of property, even if the sellers, themselves, caused the title defect which impairs the value or use of the property. Purchasers interested in property to be conveyed by Quit Claim Deed should conduct extensive due diligence before entering into a contract to purchase that property since the seller will not be responsible for the condition of the title.
Quit Claim Deeds typically are used to convey property into and out of family trusts or family business entities and between husbands and wives. The best use of a Quit Claim Deed is between husbands and wives who are terminating a relationship where the intent is that one party will retain the property and the other party will no longer be responsible for any aspect of property ownership.
The problematic and overuse of Quit Claim Deeds arises from transactions where property is conveyed from individuals to related business entities or trusts. While the intent of the parties invariably is to transfer property quickly and easily from one ownership interest to another, the use of a Quit Claim Deed severs any prior title warranties or guarantees and likely renders useless any protections of a title insurance policy under the title insurance policy’s “Continuation of Insurance” clause. For this reason, owners should conduct extensive due diligence and consult an attorney before conveying property by Quit Claim Deed to make sure they are actually protecting their interests.
Published by John F. Renger on August 23, 2016