What does your deed say?
McAfee & Taft regularly represents clients in connection with the purchase, sale and financing of agricultural real estate. Issues that arise in these transactions include all the issues that are routinely attendant to real estate transactions, such as assurance of title, surveys, boundary issues, environmental issues, and the handling of improvements.
In the agriculture industry, land makes up a significant portion of the assets of an agribusiness. In a majority of circumstances, especially in production agriculture, land is the most valuable asset the company (or family) owns. My great, great uncle Hazen John Marshall first settled the family farm in Hennessey, Oklahoma, in the 89er Land Run, and today my grandfather Hazen Earl Marshall still lives on a part of that land. This doesn’t happen by mere possession of the land. It occurs through deeds evidencing the transfer from one owner to the next.
In transfers between family members (such as what I described above), there may not be much thought given to the content of the deed. While there may be little risk in transfers between family members, it is worthwhile to understand the nuances between the various types of deeds, and to completely understand what your deed says. This is particularly important when land is acquired from an unrelated third party. In this situation, whether you are the grantor or the grantee, you need to know the type of deed that will be used.
There are three general types of deeds: general warranty deeds (sometimes referred to simply as a “warranty deed”), special warranty deeds, and quitclaim deeds. Understanding the differences in these three types of deeds is critical to understanding your obligations as a grantor and rights as a grantee.
A general warranty deed conveys to the grantee the whole interest of the grantor in the subject property. It also contains certain implied warranties of the grantor. In Oklahoma (and, more or less, most other states), those implied warranties are that:
- The grantor has title and possession of the subject property,
- The grantor has the right and authority to convey the subject property to the grantee,
- There are no encumbrances on the subject property other than what has previously been disclosed or is mentioned in the deed,
- The grantee will have “quiet and peaceable possession” of the subject property, and
- The grantor will defend the title to the subject property.
While instrumental to determining the type of deed being used, these implied warranties are not likely to be found in the text of the deed. Instead, a few simple statutory words are inserted, usually following the description of the land, which effectively incorporate these implied warranties without the necessity of specifically stating them in the text of the deed. Indeed, 16 Okla. Stat. § 19 provides that these implied warranties will be incorporated into a deed if the words “and warrant title to the same” are used in connection with the grantor’s conveyance. Under a general warranty deed, the grantor warrants and covenants to defend title against claims and demands in the subject property by all parties claiming rights arising prior to the transfer, whether caused by grantor or otherwise. Although the grantor warrants that there are no encumbrances or liens on the property, it is customary practice for a grantor to list, as an exhibit to the deed, certain exceptions to the implied warranty, such as easements burdening the property. In such a case, the grantor is saying he has clear title, except for the matters listed on that exhibit. These are frequently called the “permitted exceptions” or “permitted encumbrances.” When grantees are not represented by counsel, it is common for the exhibit (or sometimes a simple statement in the text) to state that the “permitted exceptions” to be something like “all reservations, easements, rights of way, restrictions, and covenants of record” or “all matters of record.” In a few circumstances this is harmless language, but many times there are matters of record that the grantee would like removed prior to taking title the property.
Special warranty deeds are nearly identical in concept to a general warranty deed with one significant difference. Under a special warranty deed, the grantor only warrants and covenants to defend the title against claims and demands as against the grantor only, and not otherwise. The net effect of this limitation is to relieve the grantor from any liability for claims that do not arise through him. For example, if the property is subject to a mortgage by a predecessor in title, the existence of the mortgage wouldn’t be a breach of the grantor’s special warranty. Like a general warranty deed, the implied warranties are not likely to appear in the text of the deed, but instead are incorporated with the same statutory words “and warrant title to the same” but with additional language such as “by and through grantor, and not otherwise” or substantially similar language. Despite the limited warranty given by a grantor under a special warranty deed, most special warranty deeds list exceptions to the grantor’s warranty that the property is free of encumbrances and liens. This is simply a “belts and suspenders” approach to removing all doubt that the grantee is informed of the exceptions and matters of record and that the grantor will not have liability for them. Knowing this, it is very important for grantees to carefully review the permitted exceptions exhibit to general and special warranty deeds.
Quitclaim deeds do not contain any implied warranties or covenants. Under a quitclaim deed, the grantor simply transfers its whole interest in the described real estate, but makes no covenant or representation that the grantor in fact has any interest in the subject property. Additionally, a quitclaim deed effectively “cuts off” the grantee’s benefit of all prior grantors’ implied warranties. For this reason, quitclaim deeds are rarely used in third-party transfers.
The type of deed you use will have an impact on the obligations of the grantor and rights of the grantee in the event a title problem arises with the property. Under a general warranty deed, if a grantee encounters a title issue that was caused prior to the grantee’s acquisition of the land, the grantee can make a claim against its grantor regardless of who created the title issue. Under a special warranty deed, the grantee would only be able to make a claim against its grantor if it were in fact the grantor that created the title issue. Under a quitclaim deed, the grantee would have no claims against its grantor or any prior grantor. These subtle distinctions are why the type of deed to be used can itself be a point of negotiation in land sales and purchases between unrelated third parties. Of course, in most situations there will also be a real estate purchase agreement and title insurance for the buyer that will also be an avenue for the grantee to recover its losses in the event of a title issue. In the agriculture industry, however, sometimes the only document relating to the transfer is the deed. Stay tuned in the upcoming editions of the AgLINC for an explanation of real estate purchase agreements and title insurance.