DAVID J. WILLIS ATTORNEY
Copyright © 2014. All rights reserved worldwide.
Deeds in Texas
by David J. Willis J.D., LL.M.
What is a Deed?
A deed is a written document that conveys legal and equitable title to real property. It is difficult to imagine a more important document to the real estate investor, and yet its preparation is often left to a title company attorney who represents neither buyer nor seller and who, accordingly, has no incentive to produce anything other than an inexpensive, basic form.
A deed is to be distinguished from a promissory note (or real estate lien note) which is a promise to pay a sum of money, and from a deed of trust, which provides the lender with remedies (including foreclosure) if a borrower defaults on the note. A warranty deed, note, and deed of trust are the three principal documents in most Texas residential real estate transactions.
There is no standard form for a deed although Texas does have certain rules that apply if a deed is to be valid. For instance, the parties should be named, the intent to convey property must be clear from the wording, the property must be sufficiently described, and the deed must be signed and acknowledged by the grantor. Gordon v. W. Hous. Trees, Ltd., 352 S.W.3d 32 (Tex. App.–Houston [1st Dist.] 2011, no pet.). Having said this, it is not true that all deeds are created equal. In particular, when a grantor intends to accomplish a specific objective and limit liability in doing so, the wording of a deed can be critically important. Similarly, if a buyer wishes to limit liability for an existing loan or for taxes due, a basic title company deed may not be adequate.
This chapter briefly describes different types of deeds commonly used in connection with real estate investment in Texas. It is not intended to be an exhaustive academic review of the topic.
Must deeds be recorded to be valid?
There is no requirement that a deed be recorded in the county clerk’s real property records in order to be valid–only that it be executed and delivered to the grantee (this may be done privately), at which time the transfer is fully effective between the grantor (seller) and the grantee (buyer). Recording merely gives notice to the world of the transfer and, of course, establishes priority in the event an unscrupulous seller conveys the property twice.
Recording makes it easier for title companies to research and insure the chain of title. Title companies insist on recording for this reason. Recording also informs the taxing authorities where ad valorem tax bills should be sent.
Executing and delivering a deed without immediately recording it can be a useful, inexpensive estate planning device–sometimes called "the deed in the drawer." If, for example, a parent wants to insure that property is transferred to a child without probate or other difficulty, then he or she can sign and deliver a deed with the intention that it be held and not recorded until death. This is entirely legal.
One more item relating to timing–the doctrine of "after-acquired title." If I give you a deed today to property that I do not yet own, it of course has no effect; but if I acquire that same property next week, then the deed I gave you comes to life and the property is yours.
Must deeds show the actual purchase price?
No. In fact, in Texas, it is customary to recite that the consideration paid is "ten dollars and other valuable consideration." Why? Confidentiality. While recording gives the public notice that a transaction has occurred, and therefore preserves the integrity of the chain of title, it is Texas tradition that it is not the public’s business what the purchase price was. Of course, the parties can always choose to show the actual price if they wish.
Who signs the deed?
The deed must be signed and acknowledged before a notary by the seller. The buyer’s signature is not usually required, but it may be advisable to include it if the deed contains specific agreements on the part of the buyer. In order for these to be clear and enforceable in contract, they should be set out in the deed and the buyer should also execute the deed before a notary.
Sale of Property Subject to Existing Indebtedness
Can title to property be transferred if money is owed to a lender? Yes. Title and debt are different and divisible concepts.
A "subject to" deed refers to acquiring title to property while expressly providing that the buyer assumes no liability for existing debts and liens. It is a common device used by investors in order to buy property, fix it, and then flip it for a profit, all without promising to pay the existing debt or taking any liability for it.
The sub 2 concept may be better understood by reading the following sample sub 2 deed clause: "This conveyance is made subject to any and all indebtedness of Grantor and liens against the Property, including but not limited to that certain indebtedness and liens securing same evidenced by a note in the original principal amount of $_______, dated _______, executed by Grantor and payable to the order of ____, which note is secured by a vendor’s lien retained in deed of even date recorded at Clerk’s File No. ____ in the Official Records of Real Property of _______ County, Texas, and is additionally secured by a deed of trust of even date to ____, Trustee, recorded at Clerk’s File No. ____ in the Official Records of Real Property of _______ County, Texas. Grantee does not assume payment of this or any other indebtedness of Grantor."
Sale of Property "As Is"
A grantor may be willing to sell only on an "as is" basis. In such a case, "as is" refers to the condition of the property rather than the condition of the title. In other words, an "as is" deed may also be a warranty deed. The two are not mutually exclusive. Express and implied warranties of title may be and usually are present; however, there are no warranties made in an "as is" deed as to the state or condition of the land or any improvements upon it.
This is a sample brief "as is" clause: "THE PROPERTY IS CONVEYED AND ACCEPTED ‘AS IS’ IN ITS PRESENT PHYSICAL CONDITION, WITH ALL FAULTS AND DEFECTS, KNOWN OR UNKNOWN, AND WITHOUT WARRANTIES, EXPRESS OR IMPLIED, EXCEPT FOR WARRANTIES OF TITLE AS MAY BE EXPRESSLY SET FORTH AND LIMITED HEREIN." The "as is" aspect of a conveyance is often more important in commercial transactions where the clause can be much more detailed and lengthy.
Does the presence of an "as is" clause negate any duty on the part of the seller to disclose defects? Probably not. Read our chapter on seller disclosure.
General Warranty Deed
The term "warranty deed" refers to a deed that contains both express and implied warranties (There is also a deed without warranties, discussed below.) A general warranty deed is the preferred form of deed for a buyer because it expressly warrants the entire chain of title all the way back to the sovereign, and it binds the grantor to defend against title defects, even if those defects were created prior to the grantor’s period of ownership.
Here is a sample general warranty clause: "Grantor binds Grantor and Grantor’s heirs, executors, administrators, successors and assigns to warrant and forever defend all and singular the Property to Grantee and Grantee’s heirs, executors, administrators, successors, and assigns against every person whomsoever lawfully claiming or to claim the same or any part thereof, except as to the Reservations from Conveyance and the Exceptions to Conveyance and Warranty."
What are implied warranties? Mostly what one would expect. An example is the "covenant of seisin"–a warranty that the grantor presently owns the property that is conveyed, i.e., that he has not previously conveyed it to someone else. Another is the "covenant against encumbrances" which refers to undisclosed liens that diminish the monetary value of land. Property Code section 5.023 spells out these implied warranties. Note that the scope of any warranty may be limited by a "subject to" provision which might state, for example, that a conveyance is being made subject to a boundary dispute involving a certain section of the property. A provision of this type is intended to protect the grantor against a claim for breach of warranty.
General warranty deeds predominate in sales of residential property.
Special Warranty Deed
In a special warranty deed, title is warranted only from the grantor and no further back than that. The grantor’s liability for title defects is therefore limited to his period of ownership up to and including conveyance to the grantee. Example: "Grantor binds Grantor and Grantor’s heirs, executors, administrators, successors and assigns to warrant and forever defend all and singular the Property to Grantee and Grantee’s heirs, executors, administrators, successors, and assigns against every person whomsoever lawfully claiming or to claim the same or any part thereof, when the claim is by, through, or under Grantor, but not otherwise, except as to the Reservations from Conveyance and the exceptions to Conveyance and Warranty."
Commercial properties are typically conveyed by special warranty deed. Deeds into an LLC may be either with general or special warranty, depending on the circumstances.
Deed Without Warranties
A deed without warranties is just that–a conveyance of real property without warranties, express or implied, as to any matters whatsoever. This is a sample no-warranties conveyance clause: "Grantor, for the consideration and subject to the Reservations from Conveyance and Exceptions to Conveyance and Warranty, grants, sells, and conveys to Grantee the Property, together with all and singular the rights and appurtenances thereto in any way belonging, to have and to hold it to Grantee and Grantee's heirs, executors, administrators, successors, and assigns forever, without express or implied warranty.All warranties that might arise by common law as well as the warranties in section 5.023 of the Texas Property Code (or its successor) are excluded."
Why would anyone make or accept such a conveyance? The usual case is when the parties are unsure as to the extent of the grantor’s interest, and/or if the grantor is willing to enter into the conveyance only on the condition that there is no liability for doing so. A deed without warranties may transfer the entire interest in a certain property, or it may not. The parties assume the risk of this uncertainty. A deed without warranties is therefore a lower form of deed, but it nevertheless is effective in transferring title.
Clients often call a lawyer’s office and say they need a quitclaim deed. The lawyer’s response should almost always be "No, you don’t." Why? For one reason, a quitclaim may not be a true deed at all; it merely conveys whatever interest the grantor may have in a certain property, if any such interest exists. Secondly, from a practical standpoint, title companies disdain quitclaims and will frequently require that a warranty deed be obtained instead. One does no favor to the chain of title by inserting a quitclaim into it. If a grantor is unable or unwilling to provide any warranties, then a deed without warranties should be used instead of a quitclaim.
Assumption deeds usually contain covenants of general or special warranty. The difference is that assumption deeds expressly provide that the grantee will assume liability for existing indebtedness and promise to discharge one or more existing liens against the property.
The consideration clause in an assumption deed might read as follows: "Ten dollars ($10.00) and other valuable consideration, the receipt and value of which is hereby acknowledged, including Grantee’s assumption of and promise to pay, according to its terms, all principal and interest remaining unpaid on that certain note (the "Assumed Note") in the original principal amount of $_____, dated _______, executed by________ and payable to the order of ____ (said payee together with its successors and assigns being referred to herein as "Lender"), subsequently assigned to and now held by ____. The Assumed Note is secured by an express vendor’s lien and superior title retained in deed of even date recorded at Clerk’s File No. ____ in the Official Records of Real Property of________ County, Texas, and is additionally secured by a deed of trust of even date (the "Deed of Trust") in favor of ____, Trustee, recorded at Clerk’s File No. ____ in the Official Records of Real Property of ________ County, Texas. As further consideration, Grantee promises to keep and perform all of the covenants and obligations of the Grantor contained in the Assumed Note and the Deed of Trust and to indemnify, defend, and hold Grantor harmless from any loss, attorney’s fees, expenses, or claims attributable to a breach or default of any provision of this assumption by Grantee. Grantee shall commence payments on the Assumed Note on or before the next regular due date under the Assumed Note."
Again, separate the concept of title from the concept of debt. They are related but different, and they can be divided, at least when discussing respective obligations of grantor and grantee. One can take title to property without becoming liable to pay the underlying debt. Of course, debts secured by liens against the property remain in place even if title is transferred.
Under an assumption deed the grantee declares his assumption obligation to the grantor–but, it should be pointed out, not to the lender, since the grantee has not signed the lender’s note. Similarly, the grantor has not been released from the existing note unless the lender has approved the assumption and expressly released the grantor in writing, which is so rare as to be nearly nonexistent. Expect a release only in response to full payment.
An assumption deed may be accompanied by a deed of trust to secure assumption which enables the grantor to make payments if the seller discovers that the buyer has failed to do so. The seller may then recover these advancements from the buyer. This enables the seller to proactively mitigate loss and preserve good credit. If reimbursement for advancements is not made, foreclosure may follow.
Can assumptions occur without the lender’s consent? Yes, and they often do, in spite of the due-on-sale clause contained in paragraph 18 of the widely-used FNMA deed of trust.
Deed in a Wraparound Transaction
A wraparound transaction is a form of creative seller-financing that leaves the original loan and lien on the property in place when the property is sold. The buyer makes a down payment and signs a new note to the seller (the "wraparound note") for the balance of the sales price. This wrap note, secured by a new deed of trust (the "wraparound deed of trust"), becomes a junior (subordinate) lien on the property. The buyer makes monthly payments to the seller on the wrap note and the seller in turn makes payments to the original lender. The original lender’s note is referred to as the "wrapped note," and it remains secured by the "wrapped deed of trust." The buyer receives a warranty deed (general or special) which transfers title to the property into the buyer’s name.
The consideration clause in a wraparound deed reads something like this: "Ten dollars ($10.00) and other valuable consideration, including execution of a note (the "Wraparound Note") of even date in the principal amount of $____, executed by Grantee, and payable to the order of Grantor. The Wraparound Note is secured by a vendor’s lien retained in this General Warranty Deed and by a Wraparound Deed of Trust of even date from Grantee to ____, Trustee."
Lots of details need to be addressed, so a wraparound agreement should accompany the warranty deed and other wrap documents. Wraps are complex transactions that should be undertaken only with the guidance of an attorney knowledgeable in this area.
Foreclosure Deed or Trustee’s Deed
A trustee’s deed is delivered by a lender’s trustee to the successful bidder at a foreclosure sale. The lender often bids the amount of the debt (plus accrued fees and costs) and acquires the property in this way. If the sale generates proceeds in excess of the debt, the trustee must distribute the excess funds to other lienholders in order of seniority and the remaining balance, if any, to the borrower.
Property Code section 51.009 states that a buyer at a foreclosure sale "acquires the foreclosed property ‘as is’ without any expressed or implied warranties, except as to warranties of title, and at the purchaser’s own risk; and is not a consumer." It is also certain that the trustee’s deed itself will contain its own disclaimer along the following lines:
THE PROPERTY IS CONVEYED AND ACCEPTED "AS IS," IN ITS PRESENT PHYSICAL CONDITION, WITH ALL FAULTS AND DEFECTS, KNOWN OR UNKNOWN. THE TRUSTEE MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, ORAL OR WRITTEN, AS TO TITLE, POSSESSION, QUIET ENJOYMENT, MERCHANTABILITY, MARKETABILITY, USABILITY, HABITABILITY, FITNESS OR SUITABILITY FOR ANY PARTICULAR PURPOSE, OR ENVIRONMENTAL CONDITION OF THE PROPERTY OR AS TO ANY OTHER MATTER RELATING TO THE PROPERTY. IMPLIED WARRANTIES AND ORAL STATEMENTS ARE EXPRESSLY DISCLAIMED AND EXCLUDED. THE TRUSTEE SPECIFICALLY DISCLAIMS THE VERBAL OR WRITTEN STATEMENTS OR INFORMATION INCLUDING REPRESENTATIONS AND WARRANTIES THAT MAY HAVE BEEN MADE OR PROVIDED BY AGENTS, BROKERS, INVESTORS, OR OTHER THIRD PARTIES.
Even with these limitations, a foreclosure deed is probably the cleanest title obtainable, though it does not eliminate taxes owed.
Deed Incident to Divorce
A divorce deed is typically a special warranty deed that contains a clause similar to the following: "Consideration for this transaction is the division of property pursuant to a Final Decree of Divorce dated ____ entered in Cause No. ____, IN THE MATTER OF THE MARRIAGE OF _______AND _______, in the ____ District Court of _______ County, Texas." The deed may also include an "owelty of partition" that creates a lien in favor of the grantor to secure payment of a certain sum from the other spouse. This is used to equalize the overall division of property.
The parties to a divorce should not rely on the final decree to transfer title to real property. A special warranty deed (often accompanied by a deed of trust to secure assumption) should be executed and recorded.
Deed in Lieu of Foreclosure (DIL)
A traditional deed in lieu of foreclosure is a specialized instrument designed to transfer property to a lender in satisfaction of a debt and in exchange for a full and complete release. The clauses contained in DILs can be quite technical. They begin with a general statement such as "This Deed is executed and delivered by Grantor and accepted by Grantee in lieu of Grantee demanding and collecting the Indebtedness and in lieu of the necessity for Grantee to give notice of default, notice of intent to accelerate, notice of acceleration, notice of posting for foreclosure, and conduct of a foreclosure sale of the Property." Much additional detail is then added.
Few institutional lenders today accept DILs as a means of avoiding foreclosure. The reason is that the foreclosure process itself is advantageous to the lender since it cleans up title by eliminating junior liens and clearly establishes a deficiency amount (the difference between the price at foreclosure and the balance on the note) for which the lender can then sue. Under certain circumstances, however, it may be useful to consider a unilateral DIL (i.e., without the lender’s consent). See Part II, ch. 10: Deeding Property to the Lender.
The 2009 Texas Supreme Court case of Myrad Properties, Inc. v. LaSalle Bank N.A., 300 S.W.3d 746 (Tex. 2009), provided guidelines for what would be considered "correctable," including errors in a metes and bounds description or an erroneous description of a party’s capacity. According to the court, other more substantive items (adding or deleting a parcel, for instance) could not be cured by a correction instrument. This case prompted the Texas legislature to enact Property Code sections 5.027 et seq., which add considerably more detail and differentiate between material and nonmaterial corrections.
Under Property Code sec. 5.027 et seq., a correction deed is now more properly called a "correction instrument." It may take a form similar to the old correction deed or it may be in the form of an affidavit that recites the correction. Either way, a correction instrument is a supplementary filing that relates back in time to an original deed that contained some error or mutual mistake. It corrects the mistake but leaves other terms of the conveyance intact. No new consideration is required.
Sec. 5.028 deals with correction instruments that make "nonmaterial" corrections – the classic scrivener’s error, in other words. Perhaps a distance or an angle in the legal description was misstated, or the name of a party misspelled. A person with personal knowledge of the facts may execute this type of correction instrument, but a copy of the correction instrument must be sent to each party to the original instrument.
Material corrections are a more serious issue and are addressed by sec. 5.029. An example is conveyance in the original instrument of the wrong property – lot 5 instead of lot 6 for example. A correction instrument making a material correction must be executed by each party to the original recorded instrument.
It is the better policy in practice to have any correction instrument executed by all parties.
Correction instruments are appropriate for addressing errors only. If the parties intend to alter fundamental terms of the original conveyance, then a new instrument – not a correction instrument – is required.
Deeds Involving Co-Ownership
This topic has already been extensively covered. The primary point to remember here is that co-ownership in Texas is presumed to be as tenants-in-common, meaning that heirs of each owner will inherit that owner’s respective interest upon death. The decedent’s interest (likely) passes vertically. This is contrasted with JTWROS which provides that a co-owner will inherit the other co-owner’s interest upon death – a horizontal transfer. JTWROS must be expressly created by specific wording when the property is acquired. Married buyers should consider taking title as JTWROS as basic estate planning.
Deeds with Life Estate Reserved
It is possible that an investor may encounter a situation where an older person is willing to sell but wishes to retain the right to reside in the property until his or her death. This may be an excellent investment if the property is likely to appreciate. A deed with life estate reserved should contain wording substantially similar to the following: "Grantor reserves, for Grantor and Grantor’s assigns, a legal life estate in and to the Property for the remainder of Grantor’s life, including rights to full possession, benefit, use, rents, revenues, and profits of and from the Property, until the death of Grantor (the "Life Estate") at which time full legal and equitable title to the Property shall automatically vest in Grantee, free of any interest of Grantor, Grantor’s successor, heirs, and/or assigns. Grantor shall have the right to reside in the Property without rent or charge during the Life Estate."
A fraudulent deed is a void deed, but action must generally be taken in order to establish that the deed is fraudulent. Section 51.901 of the Government Code requires a county clerk to act if there is "a reasonable basis to believe in good faith that document or instrument previously filed or recorded or offered or submitted for filing or for recording is fraudulent." One way to trigger such action is for an aggrieved party to file an affidavit which includes the property’s legal description, send a copy of the affidavit to the perpetrating party, and demand that the fraudulent deed be canceled. If this strategy is unsuccessful, a suit alleging fraud (both common law fraud and statutory fraud under Business & Commerce Code section 27.01) and requesting rescission and/or a declaratory judgment should be filed.
Note also that Civil Practice & Remedies Code section 12.002 provides that a person who knowingly and intentionally files a fraudulent lien or claim against real property may be held liable in civil district court for the greater of $10,000 or actual damages, exemplary damages, and recovery of attorney’s fees and costs.
Deeds and the Earnest Money Contract
The variety of deeds along with the choice of different clauses that can affect the conveyance and alter the liability of the parties make it advisable to a consult a real estate attorney, and do it early in the process. If an investor knows in advance that certain wording will be required in a deed (an as is clause, for example) then a provision to this effect should be included in the sales contract or special provisions addendum. Otherwise, the wording may become a matter of last-minute negotiations with potential to cause the closing to fail.
What the Attorney Needs from the Client
When an investor needs a deed prepared, the existing warranty deed to the property should be provided to the attorney along with the names and mailing addresses of seller and buyer. And, since Texas is a community property state, the client should supply the marital status of the parties and the names of spouses. If the property will be deeded into a series LLC, then the attorney will need to know which series (Series A or B, etc.), since the specific series should be stated as grantee.
Information in this article is proved for general educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes as legislatures meet and important cases occur. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well. This firm does not represent you unless and until it is expressly retained in writing to do so.
Copyright © 2014 by David J. Willis. All rights reserved worldwide. David J. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information is available at his website, www.LoneStarLandLaw.com.