GRANT DEED VS QUITCLAIM DEED
The deed of conveyance Part II of III
Title insurance
Title insurance companies insure the status of title on the conveyance of real estate interests. Occasionally, a title company fails to accurately document or search the record title of real estate, and issues a policy which does not list the seller’s activity which affected title, such as creating a lien or conveying an interest. A policy of title insurance insures the buyer (grantee) against changes in the recorded title made by the seller should the policy fail to list the seller’s title activity, unless the changes are stated in the seller’s grant deed as a condition of the title delivered to the buyer. For example, a seller encumbers his property and fails to state in his grant deed to the buyer that the buyer takes title subject to the encumbrance. No agreement regarding the encumbrance exists. Also, the title insurance company fails to discover and disclose the encumbrance as an exception to coverage. From the buyer’s point of view, both the title insurance company and the seller are liable under their agreements with the buyer; the title company under its policy, the seller under the implied covenant against further encumbrances in the grant deed. Consider an owner who grants a neighbor a view easement which imposes limits on the owner’s use of his property. The neighbor records the document conveying the easement, called an easement deed. The owner then sells the real estate, which is now subject to the view easement, to a buyer. Neither the purchase agreement nor the escrow instructions disclose the easement exists. The owner orally informs the buyer of the neighbor’s easement. The owner also informs the buyer and the title company insuring title he does not know if the easement deed is recorded. A preliminary title report issued by the title company does not disclose a recorded easement deed to the neighbor. The owner conveys the property to the buyer using an unrestricted grant deed — making no reference that the legally described real estate is subject to an easement created by the owner. The title insurance policy issued to the buyer does not list the view easement as an exception to the insured condition of title. After closing, the buyer discovers the easement was recorded prior to his acquiring title. The buyer makes a claim against the title insurance company for the amount of the decrease in the value of the property caused by the easement. The insurance company pays the buyer’s claim since the buyer was insured against the recorded existence of the view easement. Concurrently, the buyer assigns to the title company any rights held by the buyer against the seller under the seller’s grant deed. The title company then seeks to recover its payment of the claim from the seller based on the seller’s breach of the implied covenant to the buyer under the grant deed. The seller claims the title insurance company cannot enforce a claim under the assignment to the title company of the buyer’s rights against the seller under the grant deed, called equitable subrogation, since the buyer and the title insurance company were both aware of the easement before closing. Is the insurance company entitled to be subrogated to the rights of the buyer and recover the buyer’s lost value caused by the easement? Yes! The buyer’s and the insurance company’s knowledge of the easement does not prevent recovery since the buyer is entitled to rely on the implied covenant against further encumbrances which automatically accompanies the grant deed unless the covenant is restricted by writings in the grant deed or waived by the condition of title agreed to in the purchase agreement. Further, the seller would be unjustly enriched if he were allowed to keep the entire amount of the price received from the buyer since the price did not reflect the reduced value caused by the easement. Thus, the insurance company by the assignment is entitled, as a matter of fairness and equity, to step into the shoes of the buyer (subrogation equitable assignment) on payment to the buyer of the buyer’s claim under the title
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policy, and pursue enforcement of the buyer’s claim under the grant deed covenant against encumbrances. [Fidelity National Title Insurance Company v. Miller (1989) 215 CA3d 1163] Editor’s note —A preliminary title report cannot be relied on as a warranty of the condition of recorded Title. A preliminary title report is merely an offer to issue a policy on the same terms and conditions. However, the seller is entitled to offset the insurance company’s recovery of its losses if the seller can show he justifiably relied on the insurance company’s representation concerning the non-existence of a recorded easement. However, for the seller to justifiably rely on the title company, the title insurance company must issue an abstract of title policy to the seller: If an abstract of title discloses no easement of record when one exists, the title company is liable to the seller for negligence in its preparation of the abstract of title, unless it can be shown the seller knew the easement existed. [Calif. Insurance Code §12340.10]
Purchase agreement merges into grant deed
Title conditions bargained for or referenced in the buyer’s real estate purchase agreement are merged into the grant deed accepted by the buyer on closing the transaction. Thus, if a title condition, also called a covenant, is included in the purchase agreement and is not restated in the grant deed, the title condition agreed to in the purchase agreement is not enforceable as the title condition terminates on closing. By the doctrine of merger, the buyer’s title rights under a purchase agreement cease to exist on closing. The grant deed, by merger, becomes the sole remaining basis for the buyer’s rights to title. Thus, after closing, a purchase agreement condition (covenant) affecting title is only enforceable if it is implied or stated in the grant deed. If a title covenant (CC&Rs) is bargained for and agreed to in the purchase agreement but is erroneously omitted when drafting the grant deed, the grant deed can be ordered corrected to include the covenant, a legal process called reformation. [CC §3399] However, extinguishment of the title conditions in the purchase agreement by merger into the rights arising under the grant deed will not be enforced if the extinguishment of the condition of title agreed to in the purchase agreement creates an unfair and inequitable result against the buyer or seller. For example, a seller’s real estate is subject to a lease. In the purchase agreement the buyer agrees to purchase the property “subject to the lease,” which contains a term which extends beyond closing. However, the grant deed delivered to the buyer does not reference the existence of any lease created by the seller. The buyer, after taking title, claims the seller breached the implied covenants in the grant deed since the title delivered is subject to a lease created by the seller and not listed in the grant deed as a restriction on the title conveyed. Did the seller breach the implied covenants in the grant deed? No! The buyer, by the terms of the purchase agreement, waived the implied covenant’s application to the lease created by the seller. The buyer agreed in the purchase agreement to accept a conveyance of the property subject to the lease, a condition in the terms of the purchase which would otherwise have become unenforceable as merged into the grant deed. [Campbell v. Miller (1928) 205 C 22] However, a seller should not believe he will always be able to avoid liability for a breach of implied covenants when title restrictions are not contained in the grant deed and the buyer agreed to the conditions in the purchase agreement. To avoid confusion over application of these seemingly conflicting legal terms, brokers and escrow officers must ensure all conditions of title created by the seller which are to remain of record are written into the grant deed as restrictions on the enforceability of the implied covenants tied to the grant.
For example, a seller owns property which is subject to an oil and gas lease which generates oil and gas royalties. The seller conveys by grant deed the oil and gas rights and transfers the lease by assignment. Later, a buyer of the real estate is located. Neither the purchase agreement with the buyer nor the escrow instructions disclose the prior conveyance of the oil and gas rights, leases or royalties. When a preliminary title report discloses the oil lease, but not the recorded grant deed for the oil rights nor the lease assignment, the escrow instructions are amended by the seller’s broker to provide for the assignment of the lease to the buyer, if assignable. Further, the grant deed does not restrict the implied covenant of title to the property the seller is conveying. After escrow closes, the tenant is notified of the sale and sends the royalty payments to the buyer. The seller then reacquires the oil and gas rights and the oil and gas lease is reassigned back to the seller. However, on conveyance and assignment of the oil and gas rights back to the seller, the rights automatically pass to the grantee who bought the real estate from the seller. The seller had previously conveyed to the buyer fee simple in the property which included all oil and gas rights, subject only to the tenant's rights under the lease. Allowing after-acquired title to pass to the grantee protects a grantee who believes he is receiving the good title of the grantor which the grantor does not possess in the property at the time of conveyance. [Schwenn v. Kaye (1984) 155 CA3d 949]
Conveying lesser estates
If the grantee is not receiving fee simple to the real estate, but a lesser estate, the deed should state what title interest is being passed to the grantee. For example, to convey a life estate, the grant deed would state the grantee is to hold the property until the grantee’s death at which time the title will revert back to the grantor or the grantor’s heirs.
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Covenants restricted or limited
To limit the implied covenants of the grant deed, the deed should state the condition of the title created by the seller which is being accepted by the grantee. The implied covenants are waived and do not apply when the grantor and the grantee agree to the contrary. For example, if the grantee is taking title subject to encumbrances which were placed on the property by the seller, then the deed should state the legally described property is “subject to” encumbrances of record and list them. The implied covenants in the grant deed only imply the property has not been previously conveyed or encumbered by the grantor. No other covenants regarding title or the condition of the property are implied in the grant deed. For example, a seller fails to disclose to a buyer that the soil creating a fill on the property is not compacted. When the buyer builds a single family residence on the property, his residence sinks due to the uncompacted soil. The buyer sues the seller for damages due the seller’s breach of grant deed covenants since the seller failed to disclose the soil was not compacted. However, no implied covenant exists with a grant regrading the physical condition of property. Implied covenants only apply to the condition of title as altered by the seller. Thus, the buyer should have brought an action for the seller’s misrepresentation of a physical condition of the property improvements, being the fill. A seller’s misrepresentations of the conditions existing on the real estate are separate from a breach of title covenants; misrepresentations being fraud, and failure of a grant deed covenant being a breach of a contract. [Gustafson v. Dunmam Inc. (1962) 204 CA2d 10] If the grantee sought to make the condition of property a contract warranty and not just a representation, the grant deed could state the grantor is warranting the property’s condition contains no known defects.
Reprinted from: first tuesday, January 1994 P.O. Box 20068, Riverside, CA 92516 (714) 781-7300
Grant deeds and after-acquired title
Consider a grantor who conveys title to real estate he represents as his own, but does not own in part or at all. If the grantor later acquires title to the real estate interest previously conveyed, the after-acquired title to the real estate legally passes to the grantee in the grant deed originally conveying the title. [CC §1106]