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A deed is a legal document in real estate that allows the current owner of real property, known as the "grantor," to transfer valid and clear title to the interest in the property to the new owner, known as the "grantee."
A special warranty deed means that the title to the real estate is guaranteed only for the amount of time the grantor owned the property. By contrast, a general warranty deed would guarantee the title prior to the current grantor’s ownership back to the original land grant. A special warranty deed should contain “magic words” to limit the grantor’s liability to the time it owned the property. Otherwise, the deed may be a general warranty deed with a more extensive warranty.
Special warranty deeds are also known as limited warranty deeds, covenant deeds, and grant deeds, depending on the state. For example, a special warranty deed in California is called a grant deed. In South Carolina, a special warranty deed is called a covenant deed or a grant deed.
The grantee of the special warranty deed is receiving a warranty that the transferred property is actually owned by the grantor, who has the authority to transfer it. If a property has an unpaid lien (for example, from a mortgage or another creditor), then the special warranty deed will protect the grantee from liability against those only liens that were incurred while the grantor owned the property. A special warranty deed means the grantor is only providing a warranty for the time that it owned the property. If there are encumbrances or liens prior to the grantor’s ownership, the grantor will not be responsible for them when the property is transferred to the grantee using a special warranty deed.
There are some differences in special warranty deeds depending on whether it is a residential real estate property or a commercial real estate property, as outlined below:
Virtually every residential transaction uses a general warranty deed, not a special warranty deed. Notably:
Exceptions to the rule: (1) probated estate transactions and (2) foreclosure sales.
These transfers tend to use special warranty deeds. The property owner that transfers the title to the grantee who held it during the foreclosure or probate transaction is unlikely to have any knowledge of the encumbrances on the property, and as a result, that grantor won’t want to make any representations or warranties beyond its ownership- there could be liens, but the grantor won’t necessarily know about them, or may know about them, but won’t agree to be liable for them.
Special warranty deeds are commonly used for commercial transactions because these transactions tend to be less regulated.
Grantors generally receive special warranty deeds when they purchase a commercial property, so they won’t provide a greater warranty than the one that was received.
The promises contained within any deed are known as covenants. Covenants are made by the grantor to the grantee for the grantee’s protection. Covenants are not representations and warranties and are not based in fact. Title insurance protects the insured (usually the grantee) against any claims for defects in the title. Lenders usually require title insurance in both commercial and residential transactions, no matter what type of deed transfer is used.
A covenant interacts with title insurance by creating a covenant of warranty, meaning that the property is protected against claims of ownership from another party that isn’t the grantor or grantee. For example, if someone claims to own the property, and actually doesn’t, and the sale is completed, then the grantee has a claim against the title company for the defect in title, because the title company insured the transaction against defects in title. The title company that will insure the transaction should perform a title search to identify any encumbrances or other issues with the title, and then inform the grantor and grantee, so the defect can be corrected. Then, the transaction can be completed and insured.
General warranty deeds guarantee that the grantor is the owner of the property and warrant the title for all time, through the original land grant. A special warranty deed only provides protection during the ownership of the grantor. Residential transactions usually use general warranty deeds (unless it’s a foreclosure or estate transfer) because they are more highly regulated, while commercial transactions generally use special warranty deeds.
Quitclaim deeds provide little to no protection when the property is transferred from the grantor to the grantee in a real estate transaction. They simply transfer the property with no additional promises from the previous owners. Through quitclaim deeds, no interests in or rights to the property are conveyed, and there are no representations or covenants. Whatever rights the grantor has, if any, is what is conveyed to the grantee via a quitclaim deed.
A limited warranty deed is a legal document, like any other deed. The legal title to the property is transferred from the grantor to the grantee and guarantees against title defects during the grantor’s ownership. A limited warranty deed does not offer any guarantees about encumbrances prior to the grantor’s ownership. Depending on the jurisdiction, a limited warranty deed and a special warranty deed may be the same thing.
It’s important to make sure a special warranty deed is the right type of deed to use for any specific transaction. As two examples in California and South Carolina:
The grant deed is the most commonly used deed. This deed promises that the grantor did not convey the property to anyone other than the grantee, and the property is free from encumbrances placed upon it by grantor.
A warranty deed has the additional promise of a warranty of title and quiet possession, which means that the grantor will defend the grantee’s title to the property. Title insurance is common in California, and so is the practice is to use a grant deed instead of a warranty deed.
A transfer of property requires a warranty of title from the grantor to the grantee, which promises that there are no encumbrances on the property during the grantor’s ownership. The grantee is still responsible for its due diligence but is not responsible for the title search regarding the status of the property under the grantor. The guarantor promises that there are no encumbrances under the special warranty deed.
There are several potential consequences to a faulty special warranty deed. An example would be if the grantor and prior owners provide misleading information to the grantee about the real property, such as misrepresenting its ownership status. This is most common when the real property owner is deceased or absentee, but another party (often a relative) acts as if they have the legal right and authority to transfer ownership of the property, even though they don’t. A title search will generally find this break in the title chain, so it can be corrected before the transaction closes, or the transaction can be terminated. If there is no title search, or it is done incorrectly, then the deed transferring ownership is fraudulent. If it is a special warranty deed, the grantee has a claim against the grantor for its misrepresentation, and if there is title insurance, the grantee can make a claim against that as well.
The other most common error in a special warranty deed is when the deed is drafted incorrectly. Examples are an incorrect legal description or the wrong name for the grantee or the grantor. A drafting error may be easy to correct, but a deliberate misrepresentation by a party to a transaction may result in a lawsuit.
Finally, if there are multiple owners of a property, and they are not all in agreement about selling the property, that can create a problem. An example is a couple that is getting a divorce that jointly own a property or multiple siblings that have inherited a property. The grantee will want the warranties afforded in a special warranty deed, in case the people that didn’t want to sell bring a lawsuit regarding ownership of the property.
It’s usually fairly simple to draft a deed, but making sure it’s the correct deed with the correct language can be tricky. It makes sense to invest in a template special warranty deed that has been reviewed by someone with legal knowledge.
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