What Is a Special Warranty Deed?

In real estate transactions, legal documents play a crucial role in transferring property rights and protecting the interests of buyers and sellers. One such document is the special warranty deed. In this post we delve into the intricacies of the special warranty deed, examining its definition, purpose, and key features, as well as how it differs from other types of deeds. By the end you'll have a comprehensive understanding of this important legal instrument and when to use it.

What Is a Special Warranty Deed?

A special warranty deed, also known as a limited warranty deed, is a legal document used in real estate transactions to convey ownership of property from a seller (grantor) to a buyer (grantee). Unlike a general warranty deed, which provides broad assurances and protections to the grantee, a special warranty deed offers scant protection.

The primary purpose of a special warranty deed is to guarantee the grantee that the property has not been encumbered, impaired, or adversely affected by the actions of the grantor during the grantor's ownership. In simpler terms, it assures the grantee that the grantor has not created any undisclosed issues or liabilities on the property title during their ownership.

Here are some key features of a special warranty deed.

1. Limited Warranty: The special warranty deed guarantees that the grantor will defend the title against claims arising during the grantor's period of ownership. In other words, the grantor takes responsibility for any defects or encumbrances that occurred during his or her ownership but not before.
2. Covenants: While a special warranty deed does not provide extensive covenants like a general warranty deed does, it typically includes two key covenants. First is the covenant of seisin. It ensures that the grantor has legal ownership of the property. Second is the covenant against encumbrances, as mentioned. It guarantees that the property is free from undisclosed liens, restrictions, or encumbrances created by the grantor.
3. Exclusion of Prior Claims: Unlike a general warranty deed, a special warranty deed does not warrant against any defects or encumbrances that may have existed before the grantor acquired the property. It limits the grantor's liability to the grantor's period of ownership, offering protection only against issues that arose during that time.
4. Lesser Degree of Protection: A special warranty deed provides a level of assurance to the grantee, but it offers less protection than a general warranty deed. The grantee is encouraged to perform thorough due diligence, such as conducting title searches and obtaining title insurance, to ensure that there are no hidden issues with the property.

When to Use a Special Warranty Deed

The use of a special warranty deed is typically determined by the specific circumstances and preferences of the parties involved in a real estate transaction. While not suitable for every situation, a special warranty deed is common in certain scenarios. Here are a few instances when it is appropriate to use a special warranty deed.

Commercial real estate transactions.

Commercial real estate transactions involve properties intended for business, such as office buildings, retail space, or industrial complexes. These transactions often involve sophisticated buyers and sellers who conduct extensive due diligence to evaluate the property's history, potential liabilities, and encumbrances. A special warranty deed is often employed in such cases.

Commercial properties may have a more complex ownership history with multiple previous owners, making it challenging for the current seller to provide comprehensive warranties for the entire chain of title. Using a special warranty deed, the seller limits their liability and only provides warranties against any defects that occurred while they owned the property. This approach allows the buyer to make an informed decision while shielding the seller from responsibility for issues that arose before their ownership.

Foreclosure sales.

Foreclosure sales occur when a property is sold to recover outstanding debts or mortgage payments owed by the previous owner. In these cases, the selling party is typically a bank or lending institution that acquired the property through foreclosure proceedings. Since the bank did not have long-term ownership and may have limited knowledge about the property's history, it often prefers to use a special warranty deed.

By utilizing a special warranty deed, the bank limits its liability to the period it holds the property. This means that the bank only warrants against defects or encumbrances that may have arisen during its ownership, not which have occurred before the foreclosure process. This approach provides some level of assurance to the buyer while protecting the bank from potential claims related to the previous owner's actions.

Real estate investors.

Real estate investors engage in property transactions for purposes such as flipping, rental income, or long-term investment. Investors typically have a good understanding of the risks associated with property ownership and conduct thorough due diligence to assess the property's condition, market value, and potential liabilities. In many cases, investors may choose to use a special warranty deed.

As experienced investors, they are likely to have the resources and knowledge to perform their own due diligence and assess any risks associated with the property. A special warranty deed limits their liability to the period they owned the property, providing some level of protection against claims arising from their ownership. This approach aligns with their risk tolerance and allows them to focus on their investment strategy while still offering some assurance to the buyer.

Transactions involving trusts or estates.

When properties are transferred through trusts or estates, special warranty deeds are commonly used. Trusts and estates are legal entities that hold assets, including real estate, for the benefit of beneficiaries. In such cases, the executor or trustee is responsible for conveying the property to the intended beneficiary.

Since the executor or trustee may not have personal knowledge of the property's history before their involvement, they often choose to use a special warranty deed. By doing so, they limit their liability to the time when they have been managing the property. This approach acknowledges that the executor or trustee cannot guarantee the property's condition or title beyond their own period of involvement, providing some level of protection to both the executor/trustee and the beneficiary.

Boundary adjustments or parcel splits.

Boundary adjustments or parcel splits occur when landowners agree to modify the boundaries or divide their land into smaller parcels. These transactions typically involve adjoining property owners who mutually agree to the changes. In such cases, a special warranty deed is commonly employed.

Boundary adjustments or parcel splits often involve a smaller portion of land being transferred, and the ownership history and potential title issues are generally well-known and manageable. As a result, the parties involved may opt for a special warranty deed, which limits the seller's liability to the period they owned the specific portion of land being transferred. This approach recognizes that the parties have a better understanding of the property's condition and title history, allowing for a more streamlined transfer process.

In all of these instances, it is crucial for both buyers and sellers to seek advice from legal professionals who specialize in real estate transactions. These professionals can provide guidance on the appropriate type of deed to use based on the circumstances of the transaction, ensuring that the rights and interests of all parties are adequately protected.

Conclusion: Balancing Protection and Liability in Property Ownership With Special Warranty Deeds

The special warranty deed serves as a valuable legal instrument that offers a limited set of assurances and protections to the grantee. While not suitable for every situation, there are instances when a special warranty deed is common.

By understanding the purpose and features of a special warranty deed, both buyers and sellers can navigate real estate transactions with confidence. Importantly, a special warranty deed provides fewer warranties than a general warranty deed. Consequently, it is crucial for grantees to conduct their due diligence, including thorough title searches and obtaining title insurance, to mitigate any potential risks associated with the property.

While a special warranty deed offers a level of protection to the grantee, it is always advisable for both parties to consult with legal professionals who specialize in real estate law. These professionals can provide personalized guidance based on the specific circumstances of the transaction, ensuring that the rights and interests of all parties involved are adequately protected.

A special warranty deed balances the needs of buyers and sellers in real estate transactions, providing reasonable assurances while limiting the grantor's liability. While a quit-claim deed offers no protection to the buyer and a warranty deed offers many protections, a special warranty deed falls in the middle. It gives the buyer a medium level of protection.