What is a deed?
A deed is a written document that conveys legal and equitable title to real property-the legal term is a “fee simple” interest, meaning the highest level of ownership. “An absolute or ‘fee simple’ estate is one entitling the owner to the benefits of that estate during his life and descending to his heirs, devisees, and legal representatives on his death. One can own a fee simple estate in both legal and equitable property interests.” Jackson v. Wildflower Prod. Co., 505 S.W.3d 80, 88 (Tex.App.-Amarillo 2016, pet. denied).
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, boilerplate form that may omit advisable or useful clauses (depending on your perspective as grantor or grantee). Property Code Section 5.022(b) expressly states that “the parties to a conveyance may insert any clause . . . not in contravention of law.” Accordingly, a deed that is custom-drafted may and should recite certain critical deal points pertaining to the specific transaction, an obvious example of which would be an “as is” clause if you are the seller. Further, if the deed is then executed by both parties (not just the grantor), the document becomes a contract as well as a conveyance. This can have significant value if the transaction involves special provisions upon which the parties are relying.
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.
This article briefly describes different types of deeds commonly used in connection with real estate investment in Texas. It is deliberately organized in a pragmatic fashion that an investor will recognize and is not intended as a comprehensive academic review of the topic. If you are looking for the latter, then I suggest you acquire an academic textbook on property law. This article does not attempt to fill that role.
There is no standard form for a deed although Property Code Section 5.022(a) offers a simple form that may be used for fee simple conveyances. 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 by the grantor and delivered. 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.
“For a deed or instrument to effect conveyance of real property, it is not necessary to have all the formal parts of a deed formerly recognized at common law or to contain technical words. If, from the whole instrument, a grantor and grantee can be ascertained, and if there are operative words of grant showing an intention of the grantor to convey title to a real property interest to the grantee, and if the instrument is signed and acknowledged by the grantor, it is a deed which is legally effective as a conveyance.” Harlan v. Vetter, 732 S.W.2d 390 (Tex.App.-Eastland 1987, writ ref’d n.r.e.). If there is a signed written document that identifies a grantor and grantee, provides a reasonably accurate description of the property, and clearly contains the intention to convey, then that document is a “deed” under Texas law. Green v. Cannon, 33 S.W.3d 855,858 (Tex.App.-Houston [14th Dist.] 2000, pet. denied).
In the event of ambiguity or controversy, the goal of a court in interpreting a deed is “ascertaining and effectuating the parties’ intent . . . by conducting a careful and detailed examination of the deed in its entirety.” Wenske v. Ealy. 521 S.W.3d 791, 792 (Tex. 2017).
The general Texas rule is that a property description in a deed is sufficient if it identifies the property with reasonable accuracy. Morrow v. Shotwell, 477 S.W.2d 538 (Tex. 1972). Having said that, no investor should be satisfied unless the legal description is precisely correct and corresponds to previous descriptions in the chain of title. In some cases lengthy metes and bounds are used to describe the property rather than the usual “lot and block” descriptions commonly found in residential subdivisions. If such a description is outdated, or if there is any doubt as to its present accuracy (e.g., it refers to an “old oak tree for corner” or a “stream for boundary”), then a new survey would be a good investment.
If the deed for some reason refers to more than one description of the property, and there is a conflict, then the more specific metes-and-bounds description controls. Stribling v. Millican DPC Partners, LP, 458 S.W.3d 17 (Tex. 2015).
It is not required that the street address of the property be included in the deed, but it is certainly the better practice to include it. As a practical matter, this makes it easier for investors with multiple properties to determine which deed goes with which property.
A caveat concerning “legal descriptions” obtained from the appraisal district: these are typically abbreviated and condensed and not the official legal description of the property as shown in the county clerk’s real property records. Two different computer systems are involved. The legal description in a new deed should track the description (lot and block or metes and bounds) in the prior deed on file with the county clerk-corrected, if necessary-in order to preserve proper chain of title.
Implied Covenants in a Texas Deed
At common law, a deed was accompanied by six implied covenants: (1) the covenant of seisin (the grantor is the owner of the property being sold); (2) the covenant against encumbrances (the land is owned free and clear of liens); (3) the covenant that the grantor has the right to convey the property without joinder of others; (4) the covenant of quiet enjoyment, which represents an assurance by the grantor that the grantee’s title will not be disturbed by third-party claims; (5) the covenant of warranty, obliging the grantor to defend title against challenges by others; and (6) the covenant of further assurances, meaning a promise by the grantor that will take such other and further actions in the future as may be necessary to vest title in the grantee.
The Property Code, without excluding the potential existence of the common-law covenants in any particular case, recites only two, an attenuated version of the covenant of seisin and the covenant against encumbrances:
§ 5.023. Implied Covenants
(a) Unless the conveyance expressly provides otherwise, the use of “grant” or “convey” in a conveyance of an estate of inheritance or fee simple implies only that the grantor and the grantors heirs covenant to the grantee and the grantees heirs or assigns:
(1) that prior to the execution of the conveyance the grantor has not conveyed the estate or any interest in the estate to a person other than the grantee; and
(2) that at the time of the execution of the conveyance the estate is free from encumbrances.
(b) An implied covenant under this section may be the basis for a lawsuit as if it had been expressed in the conveyance.
The common-law covenant of seisin was a representation on the part of the grantor that the grantor was, in fact, the owner of the property. Section 5.023 changes this to mean that the grantor has not previously conveyed the property to someone else, which is not quite the same thing. It is unclear what advantage this more limited covenant may possess, except perhaps to make it slightly easier for a swindler to flim-flam a gullible grantee.
The law of implied covenants has been established in Texas law for quite some time. “[In] the absence of any qualifying expressions, [such implied covenants] are read into every conveyance of land or an interest of land except in quitclaim deeds.” Childress v. Siler, 272 S.W.2d 417, 420 (Tex.Civ.App.-Waco 1954, writ ref’d n.r.e).
And then came Cochran Investments, Inc. vs. Chicago Title Insurance Company, 550 S.W.3d 196 (Tex.App.-Houston [14th Dist.] 2018, pet. pending). In Cochran, the court of appeals reviewed a special warranty deed conveying a duplex and found that it was indeed possible for a deed to imply the traditional covenant of seisin, but that “it [must be] so clearly within the contemplation of the parties that they deemed it unnecessary to express it, and therefore they omitted to do so. . . A covenant will not be implied simply to make a contract fair, wise, or just.” The court (questionably) ruled that since the deed did not expressly recite that the grantor owned the property, no covenant of seisin can be implied-a ruling that does more than muddle the difference between express and implied covenants; it has the potential to turn warranty deeds into quitclaims, at least unless the grantor makes an express representation of ownership in the deed, something that occurs only rarely. Real estate professionals are eagerly waiting to see if traditional Texas law as exemplified in Childress will be reinstated.
To summarize: even though deeds may legitimately vary in form in Texas, the use of the traditional phrase “grant, sell, and convey” will always include the two statutory covenants contained in Section 5.023 unless they are waived by express language in the deed. Accordingly, even in the case of a deed without warranties (discussed below) a careful drafter will take pains to expressly disclaim these two statutory covenants.
An additional item: one occasionally hears about the implied covenant of habitability and the implied covenant of good and workmanlike construction. Both of these covenants exist in Texas, but apply only in the case of newly-built residences. Centex Homes v. Buecher, 95 S.W.3d 266, 273 (Tex. 2002).
Reservations and Exceptions
Property Code Section 5.001 provides that a deed conveys a fee simple interest in property (i.e., all of the rights to the property, without exceptions or reservations) “unless the estate is limited by express words or unless a lesser estate is conveyed or devised by construction or operation of law.” Modern deed formats usually refer to whether or not there are reservations and exceptions. These should either be expressly mentioned or “none” should be inserted in that space.
A note on terminology: “The primary distinction between a reservation and exception is that a reservation must always be in favor and [held back] for the benefit of the grantor; whereas an exception is a mere exclusion from the grant. . . .” Pich v. Lankford, 302 S.W.2D 645 (Tex. 1957). In other words, a reservation retains a certain interest in the grantor (e.g., minerals, an easement, or a life estate); by contrast, an exception stipulates that a certain interest is simply not conveyed at all, regardless of who may be the owner of it. Such language must be clear-an implied exception or reservation is not good enough. Griswold v. EOG Resources, Inc., 459 S.W.3d 713 (Tex.App.-Fort Worth 2015, no pet.). Reservations and exceptions affect the total package of rights and interests a buyer is getting, so investors should consult an attorney and place close attention to the wording.
Community Property Considerations
Texas is a community property state and it is good practice (but not required) to state the marital status of the parties in the deed, since not doing so may raise questions later. For instance, a title company involved in a subsequent transaction may want to resolve any potential community property issues by asking that a prior owner in the chain execute a marital status affidavit or take other action to assure that all community property interests are properly tied up and accounted for before title insurance is issued. So how does one do this for the grantor? Usually, by showing the grantor’s name in the deed followed by (for example) one of the following phrases:
an unmarried person;
a married person not joined herein by Grantor’s spouse as the property conveyed forms no part of the residence or business homestead;
a married person not joined herein by Grantor’s spouse as the property conveyed is his or her sole and separate property and forms no part of the residence or business homestead; or
a married person, joined herein pro forma by Grantor’s spouse even though the property herein conveyed forms no part of the residence or business homestead.
Choices for the grantee would include “an unmarried person” and “as grantee’s sole and separate property.”
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). As between a grantor and grantee, deeds are valid even if the signature of the grantor is not acknowledged before a notary. Haile v. Holtzclaw, 414 S.W.2d 916, 928 (Tex. 1967).
However, a deed must be properly acknowledged and notarized if it is to be recorded in the county clerk’s real property records (statutory recording requirements are found primarily in Property Code Chapters 12 and 13). Texas is considered a “notice” state, meaning that recording gives notice to the world of the transfer and, of course, establishes priority in the event an unscrupulous seller conveys the property twice. “Recorded instruments in a grantee’s chain of title generally establish an irrebuttable presumption of notice.” Noble Mortg. & Invs. v. D&M Vision Invs., 340 S.W.3d 65, 76 (Tex.App-Houston [1st Dist.] 2011, no pet.). All of this of course assumes that the deed is properly filed in the records of the county where it is located.
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 ensure 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 an entirely legal technique that has been used for ages. Note that there is now another option in this area-the transfer on death deed (TODD), explained below.
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.
A good reason for recording a deed is to preserve evidence of the transfer in the event the original document cannot be located. What happens when an unrecorded deed is lost or destroyed? “A deed or other document is not made ineffective by its destruction or loss. . . . Production of the original document is excused when it is established that the document has been lost or destroyed. . . . Other evidence of the contents of a writing is admissible if the original has been lost or destroyed. . . . Loss or destruction of the document is established by proof of search for this document and inability to find it.” Gause v. Gause, 496 S.W.3d 913 (Tex.App.-Austin, 2016, no pet.).
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?
A recordable 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. See below for more detail on this approach.
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 sub2 concept may be better understood by reading the following sample sub2 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 Public 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 Public 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.
Does the presence of an “as is” clause negate any duty on the part of the seller to disclose defects? The answer will almost always be no.
Note that a grantor may wish to sell and convey property by means of a deed without warranties, which is the effective equivalent of an “as is” clause in the context of title. If this is the objective of the parties, a deed without warranties is almost always a better choice than a quitclaim.
Additional Deed Clauses Reflecting Agreements between the Parties
Some lawyers take the view that a deed should be a pure conveyance, uncluttered by clauses and agreements that do not bear directly upon the transfer of title or warranties made by the grantor. The result of this approach is often to necessitate the preparation of one or more companion documents designed to contain additional items that have been agreed to between the parties. In other words, two or more documents are required rather than one. This may have value when the parties’ side agreements are confidential (not to be reflected in the public record), but otherwise it may be simpler and more direct to include such agreements in a single comprehensive document. Both grantor and grantee then sign and acknowledge the deed, making it a contract as well as a conveyance.
An example would be the sale of a rental property from one investor to another. In this scenario it would helpful to include certain assignments in the deed-e.g., assigning the escrow account, any transferrable warranties, and so forth to the grantee. Such a clause might look like this:
Grantor irrevocably, absolutely, and unconditionally grants, transfers, and assigns to Grantee, Grantee’s heirs and assigns, all of Grantor’s interest in and to the following: (1) all funds, if any, held in escrow by any lender for the purpose of paying taxes, insurance, association dues, assessments, and other charges arising from or relating to the use and occupancy of the Property; (2) all policies of casualty insurance pertaining to the Property including Grantor’s interest in and to any payments made or to be made pursuant to said policies; (3) all warranties and guaranties pertaining to the Property and the improvements, including but not limited to warranties on the structure(s) generally, the foundation, the roof, the HVAC system, appliances, and pest control, to the extent that same are in force and assignable; (4) all funds on deposit, if any, with utility providers to the Property; (5) all contracts and agreements relating to the upkeep, repair, maintenance, and operation of the Property including any structures and improvements thereon; (6) all uncollected and unpaid rents deriving from the Property, if any, whether past due, currently due, or to fall due in the future; (7) existing leases, if any, arising from or relating to use and occupancy of the Property, whether written or unwritten, pursuant to which Grantor is landlord (the “Leases”); and (8) all funds held as security deposit(s), if any, arising from or relating to the Leases. In connection with the foregoing assignments, and to effectuate same, Grantor gives and grants to Grantee a special power of attorney to receive, endorse, and deposit to its own account any checks, proceeds, disbursements, or refunds which arise from the assignments and relate to the Property. These assignments are made without representation, warranty, or recourse, and are made only to the extent that assignment of the foregoing items is lawful and consistent with existing contractual obligations and commitments of Grantor.
The following are general categories of deed types that are likely to be encountered by a Texas real estate investor:
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.”
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 investor’s LLC may be either with general or special warranty, depending on the circumstances. There is usually no reason not to use a general warranty deed for this purpose if the property is residential.
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. If one is the seller, then one cannot be too careful in assuring that all warranties are excluded. 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 covenants and warranties that might arise by common law as well as the statutory implied covenants contained in Section 5.023 of the Texas Property Code are excluded and disclaimed.”
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, 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 considered a lower form of deed, but it nevertheless is effective in transferring title. As a form of transfer, it is certainly superior to a quitclaim, discussed next.
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 is not a true deed at all since it is technically not a conveyance. It merely “quits” any “claim” by Grantor to any right, title, and interest that the grantor may have in a certain property, if any such interest exists. It does not “grant, sell, and convey” as does a deed. Rogers v. Ricane Enterprises, 884 S.W.2d 763, 769 (Tex. 1994). Secondly, from a practical standpoint, title companies disdain quitclaims and will frequently require that a proper deed be obtained instead. One does no favor to the chain of title by inserting a quitclaim into it. If the seller is unwilling to provide a conveyance with warranties, then a knowledgeable buyer should insist on a deed without warranties instead of a quitclaim.
A quitclaim contains no covenant of seisin or warranty of title. Jackson v. Wildflower Prod. Co., Inc., 505 S.W.3d 80, 90 (Tex.App.-Amarillo 2016, pet. denied).
Assumption deeds are general or special warranty deeds of the usual type. The difference is that assumption deeds expressly provide, as part of the consideration, 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 Public 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 Public 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. As a practical matter, 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 step in and 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, which gives the lender the option (but not the obligation) to accelerate the note in such cases.
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. Unlike the deed, the wraparound agreement is not recorded, so deal points that are confidential can be discussed there.
Trustee’s Deed or Foreclosure 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 BY THE TRUSTEE AND ACCEPTED BY GRANTEE “AS IS,” IN ITS PRESENT PHYSICAL CONDITION, WITH ALL FAULTS AND DEFECTS, LATENT OR PATENT, 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. Family lawyers not infrequently forget to do this.
Transfer on Death Deed (TODD)
In 2015 Texas joined more than 25 other states in allowing a transfer on death deed (TODD), which is an uncomplicated, non-probate method of transferring title to real estate when the owner dies. The Texas Real Property Transfer on Death Act is found in Estates Code Chapter 114. Section114.051 states that “An individual may transfer the individual’s interest in real property to one or more beneficiaries effective at the transferor’s death by a transfer on death deed. . . .” Moreover, a transfer on death deed is effective without consideration and without notice or delivery to or acceptance by the designated beneficiary during the life of the grantor (§114.056). All in all, a good basic estate planning device.
The instrument must be recorded and must otherwise comply with the usual legal formalities of a deed. A TODD cannot be revoked by a last will and testament but can be revoked by a recorded revocation. In fact, a TODD is revocable (by statute) even if the instrument states otherwise. Also, if the grantor sells the property by means of a recorded transfer subsequent to executing a TODD, then the TODD is automatically revoked: “If a transferor during the transferor’s lifetime conveys to any person all of the transferor’s interest in real property that is the subject of a transfer on death deed, the transfer on death deed is void as to that interest in real property” (§114.102).
Can a living trust be a “person” for purposes of being a beneficiary of a TODD? Yes, since in this context the term person has the meaning assigned by Government Code Section 31.005. In most situations, however, it would make more sense just to convey the property into the living trust contemporaneously, without waiting for the death of the grantor.
The TODD effectively replaces the former use of “Lady Bird Deeds” which are revocable deeds retaining a life estate. LBDs were designed to avoid recovery against the grantor’s probate estate by Medicaid pursuant to the Texas Medicaid Recovery Program. This issue is clearly addressed by Section 114.106(b) which provides that real property transferred by means of a TODD is not considered to be a part of the grantor’s estate. Texas law thus pushes back against the federal government’s tendency to reach all of one’s assets in exchange for its beneficence.
For those attempting to do some basic estate planning, it is possible to combine joint ownership with a TODD, so that (for example) parents now have an inexpensive alternative method to pass real property to a child upon the death of the last parent.
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 verbiage is then added.
Few institutional lenders today accept DILs as a means of avoiding foreclosure. The reason is that the foreclosure process itself is usually 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 the borrower. Under certain circumstances, however, it may be useful to consider a unilateral DIL (i.e., without the lender’s consent).
Correction Instrument under Property Code Section 5.027
The 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 non-material corrections.
Instruments of this type used to be loosely referred to as “correction deeds.” Under Property Code Section 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.
The first step is to make sure one is looking at an instrument of conveyance (e.g., a warranty deed, not an affidavit or the like). The second step is to examine the instrument and determine if the error is non-material or material. Section 5.028 deals with correction instruments that make non-material corrections to instruments of conveyance-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 without joinder of others, 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 Section 5.029. Examples are the conveyance in the original instrument of the wrong property (lot 5 instead of lot 6 for example) or conveyance of property to the wrong entity. A correction instrument affecting a material correction such as these 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.
Statute of Limitations in Deed Correction and Reformation Cases
The usual four-year statute of limitations for written documents commences on the date the deed is signed and delivered, or when a claimant discovers, or through the exercise of ordinary diligence, should have discovered the alleged error or defect (the discovery rule). There is, however, a rebuttable presumption that the respective parties know the contents of the deed at the time of closing, particularly if clearly stated, since it is the basic due diligence obligation of nearly everyone to read a document before signing or receiving it at a real estate closing. Trahan v. Mettlen, 428 S.W.3d 905 (Tex.App.-Texarkana 2014, no pet.). Waiting to take action does not work to the benefit of the plaintiff. In Jarzombek v. Ramsey (534 S.W.3d 534 (Tex.App.-San Antonio [4th Dist.] 2017, pet. denied), the court declined to reform a deed seven years after closing, stating that the discovery rule is not intended to extend the statute of limitations for the purpose of correcting conspicuous and plainly-evident mistakes.
Deeds Involving Co-Ownership
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 and a written agreement must be signed by both parties (Est. Code §§111.001(a) and 112.051). 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. It does not happen automatically, merely upon allegation. 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 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 consult a real estate attorney, and do it early in the process. If an investor seller knows in advance that certain wording will be required in a deed (an “as is” clause, for example) then a provision to that effect should be expressly included in a special provisions addendum to the earnest money contract. Otherwise, the wording of the “as is” clause (or any other custom clause) may become a matter of last-minute negotiations with potential to cause the closing to fail.
What the Attorney Needs from the Client
When a client needs a deed prepared, the existing warranty deed to the property should be provided to the attorney along with a copy of the sales contract and relevant names and addresses. And, since Texas is a community property state, the client should supply the marital status of the parties and the names of spouses. The client should also tell the attorney if there will be any exceptions or reservations from the conveyance (e.g., mineral interests). 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. And, as referenced above, the attorney will need to know if the proposed deed should be drafted to include special provisions, disclosures, disclaimers, or conditions that would make the signature of both grantor and grantee advisable.
Information in this article is provided for general educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes. 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 since we are not tax practitioners and do not offer tax advice. This firm does not represent you (i.e., no attorney-client relationship is established) unless and until it is retained and expressly agrees in writing to do so.
Copyright © 2019 by David J. Willis. All rights reserved. Mr. 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.