Understanding Deed Forms & Contract Changes

Section 13 Contract Changes

The Colorado Real Estate Commission has adopted numerous changes to the Contract to Buy and Sell Real Estate (Residential) which will go into effect in January, 2019. One of the more noteworthy modifications is Section 13, which governs the form of deed that will be used in the transaction. The new contract form defaults to a Special Warranty Deed unless the parties select an alternate form of deed. Additionally, to the extent that the deed selected by the parties is a General or Special Warranty Deed, the contract requires the deed to contain language excepting from the warranties “specific recorded exceptions described by reference to recorded documents shown as Exceptions in the Title Documents that are accepted by Buyer…” This means that if a deed containing warranties is selected, the warranty language in the deed will now contain a list of all recorded exceptions appearing in the Buyer’s title work. The list of recorded documents may be abbreviated in the event that the parties use a Special Warranty Deed, as it is only required to include recorded title exceptions that went of record during the Seller’s ownership of the property. This list of recorded title exceptions will provide additional protection to the Seller for warranty claims made by future property owners.

This contract form change provides a timely opportunity to refresh our knowledge regarding the primary differences between the four statutory forms of deed that are available to buyers and sellers in Colorado. These deeds are broadly divided into two groups based upon whether or not the conveyance from the seller to the buyer includes any warranties of title.

Group 1: General Warranty Deeds and Special Warranty Deeds

Under each of the deed forms in this category, the Seller “sells and conveys” the property to the Buyer and, at the same time, gives certain warranties of title to the Buyer. Specifically, the Seller warrants that (1) the Seller is the owner of the property and is able to convey it to the Buyer, (2) that the property is free and clear of all encumbrances, and (3) that the Buyer will enjoy quiet and peaceable possession.

The General Warranty Deed is distinguished from the Special Warranty Deed by the extent of the warranties provided. In the General Warranty Deed, the Seller’s warranty extends to defending the title against all persons who may claim an interest in the title, even if the claim arose at a prior time when the Seller was not in title to the property. Essentially, the Seller is warranting the title of all prior owners. In a Special Warranty Deed, the extent of the warranties is much more limited. The Seller warrants title only for the time that the Seller was in title to the property, and not for any prior owner. If a person’s claim to an interest in the title arose before the Seller was in title, this claim is not covered by the warranties given by the Seller.

In both types of Warranty Deeds, the extent of the warranties can be limited by excluding certain matters from the warranties. For example, the Seller can exclude recorded easements and covenants from the warranties given. This serves to protect the seller from any breach of warranty actions from future owners,  arising from those recorded easements and covenants.

Group 2: Bargain and Sale Deeds and Quitclaim Deeds

In the Bargain and Sale Deed, the Seller “sells and conveys” the property to the Buyer, but without any warranties of title. In the Quitclaim Deed, the Seller “sells and quitclaims” all the present interest that the Seller may have in the property at that time, without any warranties of title. If the Seller has no interest in the title to the property at the time that a Quitclaim Deed is prepared and recorded, the Buyer will not receive any interest in the property.

A feature of the Warranty Deeds and the Bargain and Sale Deed, but not the Quitclaim Deed, is that these deeds will all convey “after acquired title”. If the Seller did not have title to the property at the time that the Seller signed a deed conveying title to the Buyer, but the Seller subsequently acquires title to the property, then under the rules of “after acquired title”, title to the property will automatically pass to the Buyer without the need for an additional deed.

Which Deed to Choose?

The decision about which type of deed to choose is complex and it creates an inherent conflict between the Seller and Buyer. In a typical transaction, the Seller will want to limit liability under any warranties or offer no warranties at all. However, the Buyer will want the most extensive warranties without any limitations. This tension should be the subject of negotiation between the Seller and Buyer and their real estate agents.

Please keep in mind that the owner’s policy of title insurance also provides added protection to Sellers when  it comes to warranty liability. Although the Seller’s title policy terminates upon sale of the property in most respects, it continues to provide protection for claims made by future owners under a warranty theory. If the Buyer claims a breach of warranty by the Seller, the Seller’s policy of title insurance may afford coverage, subject to the terms of the policy.

The modified contact will be mandatory as of January 1, 2019. However, the new form will be available for use in late 2018. Please contact your Sales Representative at Land Title Guarantee Company for more information on this and other contract changes, so that you and your clients are ready to hit the ground running in 2019.