The Infamous Quitclaim
One of the more common questions about Texas real estate law involves Quitclaim Deeds (often mispronounced "Quick Claim Deeds.") There seems to be some sort of popular idea that a Quitclaim Deed is a simple and inexpensive means of selling land or solving real estate problems. Clients are often shocked to learn that Quitclaim Deeds are practically worthless in Texas.
So what exactly is a Quitclaim Deed? The courts have said: "A quitclaim deed conveys any title, interest, or claim of the grantor in the real property, but it does not profess that the title is valid nor does it contain any warranty or covenants of title. Thus, a quitclaim deed does not establish title in the person holding the deed, but merely passes whatever interest the grantor has in the property." Diversified, Inc. v. Hall, 23 S.W.3d 403 (Tex. App.--Houston [1st Dist.] 2000, pet. denied).
When a person signs a Quitclaim Deed, he is essentially saying, "I don't promise that I own any interest in this land, but if I do I surrender it." Compare this to language in a Warranty Deed, where the seller "grants, sells and conveys the property to the buyer ... to have and to hold it ... forever, and binds seller and seller's heirs to warrant and forever defend the property to the buyer." Under Texas real estate law, a Buyer under a Quitclaim Deed is charged with notice of any defects in title, whether they appear of record or not. (For example, John conveys the property to Bob, who does not record the deed. John then conveys the same property to Sue by a Quitclaim Deed. Even though Bob's deed does not appear in the public records Sue would be charged with notice that John no longer owned the property, and she would receive nothing through the Quitclaim Deed.) For this reason, title passing under a Quitclaim Deed is not insurable and a property that has a Quitclaim Deed in the title will remain uninsurable until the applicable statute of limitations has passed (in most cases, 25 years).
Does this mean that a Quitclaim Deed should never be used? No. Quitclaim Deeds can be useful in clearing title in some limited circumstances, such as when there is a question about whether a particular heir might have a claim to the property of an estate, or whether a person may have acquired title by adverse possession ("squatter's rights.") In the vast majority of cases, however, it will be preferable to use another kind of deed.
In most land sales, the buyer (and the buyer's lender, if any) will expect the seller to convey a valid title. (Why else would the buyer pay good money to the seller?) In such cases, the seller is expected to make a warranty to the buyer that the seller actually owns the land and has the right to sell it. Such a warranty is called the "warranty of title," and it is expressed in the form of a Warranty Deed. There are two kinds of Warranty Deeds: the Special Warranty Deed, and the General Warranty Deed.
When a seller executes a Special Warranty Deed, the seller covenants with the buyer that the seller has not personally done anything to adversely affect the title being conveyed. For example, if the seller had already sold the property to someone else, had granted someone else an undisclosed option to purchase, or had permitted an undisclosed lien to be placed on the property, the seller would be in breach of the warranty of title. However, if the title were impaired because someone else forged a prior owner's signature on a deed, or sold the property in violation of a court order, the seller would not be liable because the seller did not personally cause the title defect. For this reason, a seller will usually prefer to offer a Special Warranty Deed.
Buyers, on the other hand, would usually much rather have a General Warranty Deed. When a seller makes a general warranty, the seller covenants with the buyer that not only has the seller not personally done anything to adversely affect the title being conveyed, but neither has anyone else who has ever owned the property. Returning to our previous example, if the buyer's title is lost or impaired because someone forged the deed to the seller, the seller will be liable to the buyer for the loss even if the seller had no reason to know of the forgery.
The Interplay Between Deeds & Title Insurance
The issue of whether the buyer will receive a General or Special Warranty Deed is often a hotly contested point when negotiating a sales contract. Even if the buyer is successful in obtaining a General Warranty Deed, however, the buyer runs the risk that a title problem might arise after the seller has died, moved away, or become insolvent. There is little comfort in having a claim against someone who will not pay the claim. Obviously the buyer who has only a Special Warranty Deed is in an even more precarious position.
Fortunately, the prudent buyer need not rely solely on good luck and the credit of the seller. The buyer can obtain title insurance from a reputable underwriter. A title insurance policy provides indemnity against many forms of title defects. If a covered problem arises, the buyer can make a claim on its insurance policy, and the underwriter will either pay the cost to investigate and correct the problem, or compensate the buyer for the value of the loss.
The buyer should obtain an Owner’s Title Insurance Policy. This insurance provides the buyer with protection against specific title risks such as:
- Clerical Mistakes
- Defective Acknowledgement on Documents
- Delinquent Taxes
- Illegal Trusts
- Lost Wills
- Mistakes in Legal Description
- Platting Discrepancies
- Undisclosed Heirs
By custom in Texas, the seller is responsible for paying for the Owner’s Policy, but the person who pays is actually subject to negotiation. The premium amount for the Owner's Policy is determined by the sale price of the property and the rate is set by the Texas Department of Insurance.
If the buyer obtains a mortgage to purchase the property, there will also be a Mortgage Title Insurance Policy issued to the lender. The purpose of this insurance is to validate the lien that the lender has on the property. Before this policy is issued, the insurance company must first perform a careful search of federal, state, and county records associated with real estate. The buyer, who is borrowing money in order to pay for the property, is responsible for paying for the Mortgage Policy. The premium for the Mortgage Policy is determined by the amount of the loan and the rate is set by the Texas Department of Insurance.
The Deed Without Warranty
Texas law recognizes another form of deed that is neither a Quitclaim Deed nor a Warranty Deed, but rather something in between. Like a Warranty Deed, a Deed Without Warranty uses the "grant, sell and convey" language to establish title in the buyer. Like a Quitclaim Deed, though, a Deed Without Warranty makes no warranties or covenants of title, so the seller has no liability for title defects. A Deed Without Warranty will rarely be appropriate in a sale transaction; however, because it offers much greater protection to the buyer without any additional risk to the seller it should be considered as an alternative whenever a Quitclaim Deed might otherwise be used.
The distinction between various types of deeds is not the most exciting legal topic. However, when a title dispute arises, all parties involved (and their lawyers) will suddenly develop a keen interest in the type of deed that was used in the underlying transaction. None of the above is meant to represent a legal opinion. Anyone who has a question about legal title and/or the right to convey property is strongly urged to consult an attorney specializing in real estate law.