WATCH YOUR LANGUAGE AND DO THE (RIGHT) DEED (If the Form Does Not Fit, You Must Alter It #3)

Other than the Purchase and Sale Agreement, the Deed is the most important and often misunderstood document utilized in a real estate transaction. Like a Certificate of Title for an automobile, the Deed is the document that actually transfers the title of real estate from one to another. Unlike a Certificate of Title for an automobile, however, a Deed comes in many forms, and often contains built-in warranties regarding the state of title. Often, as is the case in Ohio, the warranties in a Deed may be “hidden” by use of abbreviated terms (e.g. “General Warranty Covenants”; See Ohio Revised Code Sections 5302.05 - .11).

Examples of deed warranties include the warrant (i.e., promise-guaranty) that: the seller owns the property and has the right to convey it; that there are no liens against the property unless otherwise stated; and that the buyer will receive possession free from court actions or other interference by others. The largest mistakes we see regarding deeds are: (1) accepting one deed vs. another without knowing the difference; (2) failing to exclude certain matters from the warranty; and (3) not understanding the “doctrine of merger”, which has the potential of nullifying purchase and sale agreement language regarding title that does not get properly translated into the deed. Especially in residential transactions, many Buyers simply agree to accept the deed at closing, upon the mistaken belief that its contents are “standard boiler plate” and the form is simply a formality. As discussed in previous “Watch Your Language” posts to this Blog, the language in a real estate contract and deed should be as unique as the unique parcel of real estate being purchased. If you don’t review and negotiate bothersome language, you will indeed be formally stuck with the form you signed. Before you review and negotiate, however, you should have a basic understanding of the types of deeds commonly utilized.

The basic types of deeds in use in Ohio are as follows:

General Warranty Deed: A General Warranty Deed is the most common form of deed in Ohio and provides the greatest protection. In this Deed, the Grantor warrants that it lawfully owns the property; that title is free and clear of all liens and encumbrances (except as may otherwise be stated in the Deed); that the Grantor has the unrestricted right to sell the property and that the Grantor will protect and defend the title for the Grantee from any claims arising from any persons. In Ohio, the statutory phrase “___ Grants, with General Warranty Covenants” is the magical phrase used to convey a deed with the above-described warranties. It is important to note that the warranties (covenants) in General Warranty Deeds are not limited to matters that occurred during the time that the Grantor owned the property; rather, the Grantor is effectively defending title against him or herself and all those who previously held title to the property.

Limited Warranty Deed: In a Limited Warranty Deed, the Grantor is only warranting title as to the period of time that he or she held title, and is not responsible for title matters that occurred previous to the Grantor’s acquisition of the property. A seller of property that does not have title insurance, or is not otherwise in a position to make warranties as to the entire history of title, should use a Limited Warranty Deed. In commercial transactions, Limited Warranty Deeds are utilized more often, especially when the deal is a below market, “as is” deal. The Limited Warranty Deed is also utilized more so in parts of the State that typically relies on title insurance for protection vs. title abstracts and opinions. In Ohio, the words “___Grants, with Limited Warranty Covenants…” will supply the statutory language to transfer a property by Limited Warranty Deed.

Quit Claim Deed: With a Quit Claim Deed, the Grantor conveys whatever interest they have in a property (if any), without any warranty whatsoever. Accordingly, if the Grantor has no interest in the property to transfer; the Grantee will not receive any interest. Quit Claim Deeds are typically used in transactions to clear up previous errors in the chain of title, or for transfers between family members.

Special Purpose Deeds: There are particular situations that call for transfers of property apart from those described above. For these situations, “Special Purpose Deeds” are utilized, and include: the Sheriff’s Deed (used in foreclosure), Executor’s Deed (used in Probate Court) and Trustee’s Deed (used in bankruptcy). With these types of Deeds, the only warranties are that the transferor has been duly appointed to transfer the property and that all necessary legal proceedings prior to transfer have been completed to permit the transfer.

Survivorship Deed: This Deed is somewhat of a misnomer, because the magical language used for a Survivorship Deed simply describes how two or more persons are acquiring title, and what automatically happens to one joint owner, upon the death of the other. The typical language to establish joint tenancy is “to _____ and _____ for their joint lives, remainder to the survivor of them”. Upon death of one of the joint tenants, their undivided interest automatically passes to the surviving joint tenant, without need for probate. Typically, the “Survivorship Deed forms” contain blanks for “covenants, if any”. These blanks are often overlooked, but it is crucial that they be filled in. Without inserting, for example, “with General (or Limited) Warranty Covenants” in the survivorship deed form, no warranties of title will be made.

Transfer on Death Deed: Even more of a misnomer than the Survivorship Deed, the Transfer on Death Deed transfers no interest in property when signed and filed. The Transfer on Death Deed is analogous to signing signature cards for a bank account, and naming a beneficiary (except the Deed is filed and recorded). During the person’s life, the beneficiary has no right or interest to the asset, but upon death, the asset will immediately transfer to the beneficiary, without need for probate.

The following “practice pointers” are provided to help you “watch your language” with deeds:

1) Review the deed before closing.
If you are the buyer (or represent the buyer), either have the seller: a) attach the deed form as an exhibit to the purchase and sale agreement; or b) put a provision in the agreement requiring: i) Seller to provide Buyer with a copy of the proposed deed, a few days prior to closing; and ii) Buyer’s reasonable approval of the deed form. Using language in the purchase agreement specifically describing the type of the deed and the title it will transfer (and making Seller’s compliance a condition to Buyer closing the deal) will also limit the potential of being unpleasantly surprised with a different deed at closing, than expected;

2) Do the (right) deed. Commercial sellers often feel they should not have to “underwrite” the title insurance company, and want to issue a Limited vs. General Warranty Deed. The need for a Limited vs. General Warranty Deed (from the seller’s standpoint) is magnified when the seller has no title insurance, or has only held the property for a short period of time. If the buyer can get a good title insurance policy, the issue is minimized. However, as with any insurance policy, there are limitations and exceptions. Accordingly, buyers accepting Limited Warranty Deeds should ensure that the title company’s “standard exceptions” are deleted, get “gap coverage” and consider appropriate endorsements as the buyer will have no recourse against the seller for title problems caused prior to their seller’s ownership.

In residential deals, we often see buyers enamored with survivorship deeds to “avoid probate”. The problem, however, is tax and liability issues could vastly exceed probate costs. Legal counsel should be consulted to see if a limited liability company, trust, or other “ownership vehicle” makes more sense than a joint tenancy with survivorship rights.

3) Use the right magic (statutory) language. Sections 5302.05 - .11 of the Ohio Revised Code sets forth deed forms and the correct, statutory language. Archaic language can be utilized, but following the statutory words “with General Warranty Covenants”, for example, ensures that the buyer will receive exactly that, and nothing less.

4) Don’t forget the exceptions. Warranty Deeds typically have a “subject to clause”, excepting matters such as zoning ordinances, taxes and assessments not yet due and payable, certain matters (or all matters) of record and survey matters. If you are selling, and don’t have a “subject to clause”, you are in effect, promising clear title with no encumbrances whatsoever. If you are buying, and the “subject to clause” states “subject to state of facts an accurate survey would show”, you have just accepted any encroachments onto your property. The obvious buyer protection here is to get a survey, and a right to walk away from the deal if the survey shows material encroachments…

Do you really need to worry about the deed, if the purchase agreement spells out what deed you are to get? As Reagan used to say to Russia, “trust but verify”! This is especially true in real estate law due to the “Doctrine of Merger”. While coverage of this issue is a blog article in and of itself, suffice to say that as a general rule, if the deed transfers a different title than what is called for in the purchase agreement, and there is no fraud or mutual mistake involved, and no “survival clause” (clause stating that all covenants in the contract survive the filing of the deed), the buyer gets what the deed gave him/her, not what the contract promised. The disgruntled property buyer (or seller) in this situation has no legal grounds to insist that the other party accept changes to the deed after it is filed.

The moral of this story? Watch your language and do the (right) deed. If the form does not fit, you must alter it…before closing.

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