Not all Deeds Are Created Equal. Or, All Real Estate Is Local

When you buy land (or conduct other more complex transactions in real property), one unavoidable task is sorting out who holds rights in it -- who has claims on the parcel's title.  Sometimes it's useful to go back to the fundamentals.

The situation in the Early Middle Ages times was pretty basic:  walk up the hill, look around, see who's squatting, post a marker, square things with the King, and Bob's your uncle.  Of course, the ghosts of some of those doctrines are still around -- look around (due diligence); see who's squatting (adverse possession); post a marker (stake claims); square things with the King (pay your taxes).  At some point, though, kings decided they wanted a bigger piece of the action -- not just a tithe, but to manage the only official records of who knows what.  William the Conqueror looked around Britain and uttered something like "Nullam Angliae terra. Puto custodit eam."  (Nice country. I think we'll keep it.) 

The resulting invention -- the Domesday Book -- brought us the beginning of modern land title practices.  The name evokes 'Doomsday', an analogy to the absolute, Judgment-Day-like unappealable finality of the land decisions of the king's auditors.  As a result, medieval real estate developers (well, OK, nobles) reduced their staff of armed horsemen, to clear off & occupy the land . . . and invested more in scribes and clerks, to create and manage paper title records.  At which point some enterprising locals, smelling a way to make a buck off the developers, probably remarked: "Ibo ad schola iuris." (Time to enroll in law school.)  

Today's Domesday books, in the hands of county recorders and the like, are complex, and sometimes incomplete, and there are a host of other interests that may not be recorded.  So there's always a risk that you are buying a parcel from the wrong party, or that has other stakeholders attached to it.  A thousand years after Domesday, lawyers still have a strong hold on that process -- but more so in some places than others. 

Here in California, as with most states in the U.S., we lay off a lot of the risk on title insurance companies, who research a parcel's title and issue policies assuring about unknown interests.  (See www.alta.org for more.)  In a few other states, lawyers still do the work and issue legal "title opinions." And there are a few jurisdictions (like "Torrens title" systems) where the public recording office itself provides more assurance against unknowns. 

The way these differences crop up in daily deal life, usually, is in the form of deed offered for the property.  In most states, there are three levels of protection that can be given by a deed.

The highest level of protection for a buyer (and risk for a seller) comes from warranty deeds (which are called “general warranty deeds in some states other than California).  These deeds include the seller's warranty of marketable title - basically a promise from the seller that it is providing marketable title to the buyer.  In other words, the seller is essentially guaranteeing that there are no other adverse claims that will get in the way of the buyer's possession and other rights to the property – and it will defend the buyer’s title against anyone (shades of medieval trial by combat linger in these reps and warranties).  Out here in California, general warranty deeds are not used much, because title insurance is widely available to cover the risk of adverse claims, and no one wants to pay a California lawyer to research title so they can give a warranty deed, because buying title insurance is much less expensive. 

Instead, almost all commercial transactions in California use “grant deeds” (also known as "special warranty deeds" in many other states).  These deeds provide a middle level of protection to the buyer and risk to the seller:  they include several specific limited promises (for example, the seller promises he hasn't sold the property to someone else or granted liens on it), and no others.  

There's also a lower level of conveyance deed called a "quitclaim deed", which basically says, "you have whatever we had, but we make no promises about how good our title was, or even whether we had any claim at all to the property we’re transferring to you.”  I could legally give every reader of this blog a quitclaim deed to the Empire State Building, and I would have no liability to any of them, because my quitclaim deed would not be deemed to include any warranty (or statement) that I had any right to the Empire State Building (as, indeed, I do not).  That's not usually commercially acceptable -- though we do see it sometimes in, for example, re-sales by the government of repossessed property from lenders, where the Feds really have little idea themselves what is in the bag they ended up holding.

Tied to the form of deed are a couple of other things.  One is what kind of written statement a seller will give.  (Can the title insurer get a statement from them that they know of no other liens?  And so on.)  Another is price -- a seller who has no idea, and gives no promises, about the quality of title, is going to get a lot less money for their property, if they can sell on those terms at all.

Working well with these issues, and mismatches of expectations, is one of the hallmarks of good real estate lawyers -- or bad ones.  As lots of national cross-border loan and property portfolios are being worked out, these days.   We have seen a big uptick in (for example) Pennsylvania lawyers for a New York seller selling loans in California to an Illinois buyer . . . or something like that.  You know from other articles on this blog that one always has check deals for compliance with local law -- covering such issues as required recordable forms, rent revenue assignments rules, or anti-deficiency laws, in a specific state.  Even in something as simple as the form of the deed, those local practices can be paramount to a valid deal.  You'd think lawyers would take care to get them right every time.  And yet, that’s not the case.

In a recession, there's a strong temptation for counsel to cut corners and hoard work, claiming that they can do everything in every state.  But that reflex can be fatal to a real estate deal that's flawed under local applicable rules.  You need to know what's actually negotiable, and what's a question of simple validity, every time.  Taking positions when negotiating like:

  *  “We're from State A, and we always use form B,” or

  *  “My client is X, and X doesn't ever give assurances except Y,” or

  *  “You care more about this than we do, so you will have to settle for Z,“

may impress a client with bravado.  But no amount of such impressive posturing will save you or your lawyer later, if a nice person from the county recorder's office or the escrow company looks up at the deal closing (inevitably when everyone has deal fatigue and the wire transfer is ready to go) and says: "Gosh, I'm sorry, but we just can't close today, we don't use that funny-looking B/Y/Z thing, so these documents just aren't recordable here in East Batwing County." 

A healthy respect for local law has to be in every real estate lawyer's toolkit.  Getting the locally used form of deed right, and understanding what it really conveys, is pretty basic, but vitally important.