Property Specific Deed Exceptions

Owner purchased Black Acre in 1987 for $60,000 from Seller. Seller conveyed Black Acre to Owner through a general warranty deed. Seller paid for a title policy. The title company which issued Owner's policy did not find a recorded mineral reservation against Black Acre and therefore failed to show the mineral reservation as an exception in the policy. Owner recently learned that someone else owns the mineral rights under Black Acre and the holder of the minerals has commenced mining activity. In 2000, Black Acre should be worth $150,000, but is now only worth $40,000 because of the mineral severance and pending mining activity. Does Owner have recourse against the title company or Seller for Owner's damages of $110,000?

Unless the title company could prove that Owner had an awareness of the severed minerals prior to closing, Owner has recourse against the title company. While a title insurance company might argue about the amount of the damages, the title company is unlikely to argue that it does not have liability under its policy. This type of scenario is precisely why Owner obtained title insurance.

Yet what is the maximum extent of the title company's liability? Unless there was an inflation endorsement on the original policy, the title company's total liability under the policy is likely to only be $60,000. (Note that even with an inflation endorsement, much real estate has appreciated over the last 10 years at a rate which exceeds the inflation rate.) Does Owner have recourse against Seller for the remaining $50,000 of Owner's damages? Probably not, based upon the way most deeds are prepared.

Most warranty deeds are prepared with an exception section making certain exceptions to a seller's warranties of title in a general warranty deed. When buyers are not represented by attorneys, it is common for the exception to the grantor's warranty of title to read something like: ". . . and except taxes for the year of closing; and except all reservations, rights of way, restrictions and covenants of record." (This article refers to this type of exception as a "broad exception.") Since the mineral reservation was of record, this broad exception insulates Seller from liability in this case and renders sellers' warranties of title meaningless in most cases.

The result would have been much different had the exceptions section in the deed contained a "property specific exception" which identified Black Acre's known title blemishes. This could have been done by having the exceptions section in the deed read something like: ". . . and except taxes for the year of closing; and except for those encumbrances identified on Exhibit A attached hereto" where Exhibit A mirrors the property specific exceptions from the exception section of the title commitment. With a property specific exception section, the mineral reservation would not have been identified as an exception in the deed and Owner would have recourse against Seller based upon the warranties of title in the deed.

Effective September 1, 1999, aware of the routine practice of title companies to prepare warranty deeds with a broad exception, the Colorado Real Estate Commission amended the Transfer of Title section of the deed (§ 12) to state: "Title shall be conveyed subject to: a. those specific Exceptions described by reference to recorded documents as reflected in the Title Documents accepted by Buyer in accordance with § 8 a [Title Review] . . . ." In other words, for more than a year, the contract has required deeds to identify property specific exceptions, rather than a having a broad exceptions section. Yet this author's experience suggests that title companies have not altered their routines to adjust to this change.

While a broker may later have recourse against a title company for an improperly prepared deed, title companies prepare deeds as agents for the broker. Brokers are vicariously liable to the public for the mistakes of their agents.

In the 1987 example above, through August of 1999, it was industry practice for deeds to be prepared with a broad exception. If a buyer's agent was involved in the 1987 transaction, that buyer's agent was not negligent, even though the broad exception hurt the buyer. However, buyer's agents and transaction-brokers closing transactions in the 21st century will be held accountable if deeds are prepared inconsistently with the contract and such breaches hurt buyers. Brokers need to educate title companies to adjust title company practices to comply with the contract so that property specific exception sections become routine.

Jonathan A. Goodman is a shareholder with Frascona, Joiner, Goodman and Greenstein, P.C., a Colorado law firm.   His practice areas include Real Estate, Brokerage Law, Contracts, Land Use, Leasing, Real Estate Title, Association Law, Business Law, and Finance.   He can be reached at contact Jonathan Goodman.

A version of this article appeared in the Colorado REALTOR® News, the monthly publication of the Colorado Association of REALTORS®.

Disclaimer -- Content is general information only. Information is not provided as advice for a specific matter, nor does its publication create an attorney-client relationship. Laws vary from one state to another. For legal advice on a specific matter, consult an attorney.