General Warranty Deed Versus Limited Warranty Deed
April 10, 2014 10:38 Filed in: Deeds
Warranty Deed versus Limited Warranty Deed explained.
General Versus Limited Warranty Deed
The 2014 revisions to the Georgia Association of Realtors Purchase and Sale Agreement changed the deed requirement of sellers from general warranty deed to limited warranty deed (also known as "Special Warranty Deed"). Traditionally, buyers have insisted on the higher quality warranty deed, so what practical effect results in title by limited warranty deed?
1. Buyers Take Lower Quality Title
A limited warranty deed means your buyer will receive a lesser quality of title. Under a limited warranty deed a buyer will have full recourse against his seller, but only for defects that are created by the seller. There is little or no recourse against the seller or prior owners for defects created by prior owners, as in the case of a general warranty deed.
2. Sellers Carry Less Liability after Closing
When title transfers are made by general warranty deed, the warranty remains in the chain of title from owner to owner and can keep a prior owner on the hook for defects he knew nothing about. On the other hand, when a seller transfers by limited warranty deed, he is not responsible to his buyer or subsequent owners for defects that were in existence prior to his ownership. Instead, a seller by limited warranty deed is liable only for defects he created.
3. Title Insurance is More Important
Since buyers have less recourse against sellers for title defects, it is more important than ever for a buyer to obtain title insurance at closing. It is significant to point out that title policies in Georgia insure buyers the same, regardless of the quality of title received or deed instrument type used in the conveyance.
For example, if a buyer takes title by warranty deed or a lesser form of a deed such as by limited warranty deed or even quitclaim deed, coverage under an owner’s title policy is the same.
4. No More Piggybacking
Owner’s title insurance policies continue to remain in effect after the insured property is re-sold. In the past, some buyers may have indirectly relied on their seller's title policies for a lesser type of limited coverage. However, the possibility of an indemnification claim on a prior policy evaporates due to the absence of warranties contained in the seller's new limited warranty deed. In other words, an owner’s policy becomes less important to the insured seller after the property is re-sold when a limited warranty deed is used and the buyer gets little to no benefit from it after closing.
Is the Change Good or Bad?
In commercial closings, REO sales and new construction, it has been the norm to sell by limited warranty deed. In addition, attorney drafted residential purchase and sale agreements often call for a limited warranty deed, anyway. The limited warranty deed allows the seller to walk away from the property after closing in a way that is not possible using a general warranty deed. In sum, this change puts the consumer-seller in the same position as the more sophisticated corporate counterpart.
Consumer buyers, however, should be on guard. First, "limited warranty" equates to "limited recourse" against sellers for title defects. Remember, limited liability is the reason this deed type is favored by corporate sellers in the first place. Second, conveying by limited warranty deed pushes the purchaser to buy title insurance, when instead, title insurance should be perceived not as a requirement, but as a prudent option. However, most consumers already recognize the need for title insurance and expect to pay for owner’s title insurance anyway. Third, should a defect arise, the property owner may have to rely solely on title insurance coverage in lieu of claims against his seller. In certain situations, a buyer may have better recourse or leverage against a seller than coverage afforded by a title policy. In sum, the limited warranty deed highlights the importance of title insurance and as well as proper inspection of the property from a title and survey perspective.
Please see article on “Tips for Dealing with Limited Warranty Deeds.”
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