Agent & Buyer Primer on Title & Warranty Clause Changes

Contracts used by Realtor® associations on the Virginia peninsula (and the entire state, I think) provide several important clauses relating to the quality of title a seller is obligated to deliver to the buyer, and the type of deed (warranty really) by which the seller will transfer and guarantee title to a buyer.  As a result of the economic climate more and more sellers are institutional sellers.  More often than not these institutional sellers want to limit their liability because they only owned the property for a short period and acquired it under adverse or unusual circumstances.  This primer is intended to answer the FAQ’s I get as a result.

As you read through the FAQ questions and answers, or seek to determine the answer to your particular question, please bear in mind two factors:  first, you should only accept a deviation from the standard and customary contract title language and deed warranty when you have an institutional seller (and really want the house despite the risk) – there is simply no reason why you should accept these changes with a different category of seller; and, second, a primer is no substitute for a face to face meeting with me or any lawyer so this is to be considered a guide, not legal advice applicable to any given situation and set of facts.

What does “marketable title” mean?

 Title simply means ownership.  While the Virginia Supreme court’s definition is actually more complex, it has said in part that “marketable title” is one which a reasonably well-informed and prudent person, acting upon business principles and with full knowledge of the facts and their legal significance, would be willing to accept, with the assurance that he, in turn, could sell or mortgage the property at its fair value.  In layman’s terms, it is good title, and there are no problems that would affect your ability to re-sell it.

What does the VAR contract language “render the title unmarketable” mean?

I’m not sure why VAR couldn’t have taken the normal approach and just said “marketable title” like the rest of the world but I suppose the phrases are functionally equivalent in context (technically the VAR contract carves out possible exceptions and problems, like easements, and says they are okay as long as they do not render title unmarketable).

What does the language insurable title mean?

Simply stated, insurable title is title that a title insurance company will insure.  Note, however, that title insurance companies might insure against defects that would render title unmarketable.  An old, unreleased, deed of trust is one example (not a good one perhaps because they will rarely insure over unreleased deeds of trust, but you get the point -- and for enough money they will insure anything I suppose).  This is complicated because a title policy can contain exceptions, which raises the question whether it is “insurable” if a policy is issued but contains exceptions that are unmarketable in nature.

What does the REIN contract language “marketable and insurable title” mean?

Ah, the best of both worlds: add the answers above and you get this one.  Kudos to REIN.

Is it okay if the seller’s addendum removes or changes the marketable title language?

Honestly no.  If this is changed in the contract the buyer is obligated to buy even if title is bad.  If the seller just flat out refuses to bend on this deal point, and the buyer just has to have the property, then you have three choices: (a) take significant risk, (b) do a title search and get a title insurance binder (a binder is a written promise to insure) before the contract is ratified (or during a contractual due diligence period) – but problems could still come up between the search and then closing and so that should be covered as well, (c) try and counter with a counter/addendum expressly providing that if title is not “clear, marketable and insurable then either Buyer or Seller has a right to cancel the contract.”  With this language the seller is not at risk of being in breach should there be a problem but the buyer is also protected.  Honestly, if a seller won’t accept that you just need to walk away.

Is it okay if the seller’s addendum removes or changes the insurable title language?

All marketable title should be insurable (however, not all insurable title is marketable).  Note, however, that both the REIN and VAR contracts have exceptions for easements, etc. and so title could be contractually marketable, but not insurable because a title company might not insure where such contractually excluded matters like certain restrictive covenants, easements, etc. are present.  If financing is a contingency the buyer might have an out if a lender’s title insurance policy cannot be issued.  To answer the question then: I seriously question why a seller needs to remove language at least promising “insurable title” – think about the significance of that.  A middle ground is a counter/addendum expressly providing that if title is not “clear, marketable and insurable then either Buyer or Seller has a right to cancel the contract.”  With this language the seller is not at risk of being in breach should there be a problem but the buyer is also protected.

Is it okay if the seller’s addendum removes the marketable title language and replaces it with insurable title language?

Not quite a mortal wound since insurable title offers some protection for a buyer.  But as noted above they are not the same.  I would try the counter and options described in the FAQ regarding removing it entirely.

What does the word “warranty” mean when it is used to describe a deed?

Same definition we give to it when we use in the context of other warranties, e.g. a car warranty.  It is a promise, a guarantee.

What is a general warranty deed?

A general warranty deed seller warrants (promises or guarantees) that he holds clear title to the property and has a right to sell it.   This warranty covers all problems created back in the chain of title (as opposed to the special warranty’s promise only that the immediate seller has not created a title problem).  So, if a title problem arises the buyer would have the right, even years later, to sue the seller for breach of warranty, and in some circumstances force the seller to cooperate in getting the problem fixed.  Note that deed title warranties do not cover condition of the property.

What is a special warranty deed?

A special warranty deed seller warrants (promises or guarantees) only that he has not created a title problem (as opposed to the general warranty’s promise that no one has).  Obviously then general warranty is better than special warranty.   One can later convey by general warranty even though title was taken with special warranty (or even with no warranty, see quitclaim deed below).  So, if a title problem later arises the buyer would have the right, even years later, to sue the seller for breach of warranty but only if the seller created the problem.  Fiduciaries (e.g. trustees) should always convey by special warranty and the contract should so reflect (and the VAR contract, unlike the REIN contract, has language to that effect).  Note that deed title warranties do not cover condition of the property.

How does a special warranty deed differ from a general warranty deed?

Whereas a general warranty seller’s guarantee covers all problems created back in the chain of title, a special warranty seller only promises only he has not created a title problem. 

Is it okay if the seller’s addendum changes the contract from general to special warranty deed?

I would prefer, as should you, that it be conveyed by general warranty, but yes I think that is an acceptable risk.  General warranty is better of course as noted above, but if the buyer purchases an enhanced owners title insurance policy then the buyer should be okay.  Remember the deed warranty gives you a right to sue for breach of that warranty, but since a lawsuit isn’t always the best remedy around (turnip sellers, sellers cannot be found, etc.) having a financially sound title insurance company to pay or defend a claim (or fix the problem) is a pretty good remedy.

What is a quitclaim deed (note, it is not “quickclaim”)?

A quitclaim deed is one where the seller makes no promise or warranty whatsoever as to title.  In effect, the seller says that he isn’t promising whatsoever that he has any interest in the property but that if he does own an interest you have it.

How does a quitclaim deed differ from special and general warranty deeds?

In the nature of the warranty or guarantee as to title – whereas special and general warranty deeds have a title guarantee the quitclaim deed has none whatsoever.  Think of the three of them as general warranty deed, special warranty deed, and no warranty deed (quitclaim).

Is it okay if the seller’s addendum changes the contract from general warranty to quitclaim deed?

Not really (and definitely not if the seller is also making changes to the quality of title at closing language unless the buyer personally meets with a lawyer and understands what she is doing).  But like the answer to the special warranty change question if the buyer purchases an enhanced owners title insurance policy then the buyer should be okay.  I just would really go on high alert, and so should any buyer, when there is a seller who wants to convey by quitclaim deed.

What is owner’s title insurance?

Title insurance is insurance, just like any other insurance, except that here it insures against defects in ownership.  A policy of title insurance is like a pre-paid legal agreement: the title insurer will provide legal defense against challenges to the buyer’s insured title (dependent, of course, upon the type of policy coverage) and will reimburse the buyer financially for losses due to covered defects in the buyer’s ownership rights. An owner's policy insures buyers that the title to the real estate is free from all defects, liens and encumbrances except those that are listed as exceptions in the policy or are excluded from the policy’s coverage.  It also covers losses and damages suffered if the title is unmarketable. The policy also provides coverage for loss if there is no right of access to the land.  These are the basic coverages and an enhanced residential owner's policy can be purchased that cover additional items of loss.

If I get owner’s title insurance am I protected?

About as protected as you can possibly get, particularly with an enhanced title insurance policy.  I highly recommend it.  If you ever have a loan officer or lender tell you that an owner’s policy is not needed (so you can save some money) you ought to ask them why then they require you to pay for a (lender’s) policy to protect them.  If you ever have a real estate agent tell you an owner’s policy is not needed you ought to get that in writing so you can later sue them (does not need to be in writing, it’s just that the evidence of the bad advice is better).

Doesn’t the lender’s title insurance policy protect me?

No.  It is called a lender’s policy because the lender is the insured, not the buyer, which means the buyer has no rights whatsoever under that policy.  Many people think that if a lender’s policy pays the note will be paid and so the loss will not be that great and so they are somewhat protected.  This is misguided and wrong for several reasons.  First, an owner is not compensated for the equity in the property.  Second, even if the lender’s policy “pays off” what in effect happens is that the title insurance company will buy the note from the lender.  So even then the buyer is not helped because the title insurance company steps into the shoes of the lender – who has an unpaid note from the buyer – and they can insist a buyer pay regardless whether the collateral for the loan has been lost or not.  Besides, a lender’s policy only insures the deed of trust securing the note, not the fee simple title a buyer would be concerned about, and so there are many different coverage provisions.

I’m so confused, what do I do?

Call me at 757.595.5655 or email me at bdlytle@lytlelaw.com where I may or may not provide you with an FAQB -- Frequently Asked Question Bill (:

My Aunt Frieda

I am asked disclosure questions at least once a week, so let’s just review the basics in this post:

Va. Code § 54.1-2131(B) requires listing agents to disclose, in writing, to prospective buyers, material adverse facts pertaining to the physical condition of the property.  So, your disclosure calculus is always as follows:

1. Is it Physical Condition?  This is usually pretty easy.  Now includes physical condition of the land e.g. drainage, not just the improvements e.g. the house.
   
2. Is it Material? Would it cause a reasonable buyer to make a different decision with regards to the contract, price, etc.?  Recall a jury decides this.
   
3. Is it Adverse?  You really wouldn’t be worried if it was a good thing would you?
   
4. Is it a Fact? A fact is something that can be proven true or false.  Note that an opinion may be considered a statement of fact if the opinion suggests a fact exists.  This can be tricky, e.g. two termite letters.
   

So, I simply work through these for each and every disclosure question.  Remember they must be facts actually known by the agent, and you are only obligated to disclose to prospective buyers.  If all answers are yes, then disclose.

A simple mnemonic will help you remember 1 through 4: Please Call My Aunt Frieda. 

But please call your Auntie Supervising Broker if you are unsure.

Brian, a friend of mine has power of attorney for her incompetent mom. Can she transfer the house to herself and then sell?

Probably not.  This question raises several important points regarding powers of attorney.

First, we need determine whether the power allows the attorney-in-fact (the donee of the power) to act during the donor’s incompetency (disability).  In  Virginia a power of attorney does not survive disability unless it specifically says it does (which is why you’ll see such powers sometimes called “durable” powers of attorney).

Second, the attorney-in-fact is a fiduciary.  The Virginia Supreme Court says that in such a situation “any transaction to the benefit of the "[fiduciary] and to the detriment of the other is presumptively fraudulent” and that “the burden is on the [fiduciary] to overcome the presumption of constructive fraud by clear and convincing evidence.”  This is referred to as self-dealing.

That is tough language, and as a result a title insurance company will be loathe to insure title where this has occurred in the chain.  It is possible, of course, depending on the specific facts and the specific language of the power to overcome the problem, which is why the answer is not an outright no.

Please be careful where there has been such a transfer (or will be) and have the client get legal advice beforehand.

I’m here if you need me.