I Promised What? Sellers of Real Estate, Beware! (Buyers too)
Sellers of real property sign a Statutory Warranty Deed (“SWD”) at the closing of the vast majority of residential real estate transactions. This is the document that actually transfers title from seller to buyer. If you sell a piece of real estate and give your buyer a SWD, you are promising a lot more than you might think.
In the 2011 case Edmonson v. Popchoi, the Washington Supreme Court clarified and reaffirmed a seller’s duty under a SWD to defend claims brought against the buyer for “adverse possession.” In short, adverse possession is the legal premise that neighbor N automatically takes title to portion P of a person’s land when N uses P in the manner of a reasonable true owner, and that use is (a) open/obvious, (b) continuous for 10 years and (c) exclusive, i.e. the true owner does not also use the land.
Edmonson is a good illustration of how easily an adverse possession claim can arise: There, after the sale of the house closed, Neighbor claimed that (a) a fence separating his property from Buyer’s property was several feet inside Buyer’s property line and (b) the fence had been there more than 10 years. This means Neighbor (and Neighbor alone) occupied a “strip” of land which the SWD says Buyer owns. Next, Neighbor filed a lawsuit claiming adverse possession, asking the court to declare that he (Neighbor) owned Buyer’s “strip” located on Neighbor’s side of the fence. The Supreme Court said Seller had the duty to pay a lawyer to represent Buyer in defending against Neighbor’s claim. Seller was not entitled to condition his duty on retaining the right to settle Neighbor’s claim. Because Seller did not defend against Neighbor’s claim, Seller had to pay Buyer all the attorney fees Buyer spent defending against the claim. Even worse for Seller, Buyer had a survey of Seller’s property before the sale and thus knew about Neighbor’s potential adverse possession claim. But the Supreme Court said Buyer’s knowledge did not matter; Seller still had the “duty to defend” under the SWD. See also RCW 64.04.030.
Why is this case important to sellers and buyers in Washington? Mainly because only rare and expensive “extended” title insurance policies insure buyers against adverse possession claims. Very few homeowners own such extended policies. Thus, if you end up in the shoes of the Edmonson Seller, you will be personally on the hook to pay a lawyer to defend a neighbor’s adverse possession claim, with no insurance to pay that lawyer. Worse for sellers, buyers have six years after closing to tender defense of a neighbor’s adverse possession claim.
So what should buyers and sellers do?
First, sellers can give buyers a Bargain and Sale Deed (“BSD”) instead of a SWD. However, because a BSD contains fewer promises to the buyer and is not typical, the buyer (or his agent) might become suspicious or want a reduced purchase price. Furthermore, real estate agents, title companies and escrow companies are often not familiar with the BSD.
Second, sellers might want to have the property surveyed before closing. This will likely reveal any encroachment and allow for resolution of the issue before closing. But beware, simply revealing the fact of the encroachment to the buyer (whether in the Form 17 or otherwise) will not get the seller off the hook if he gives the buyer a SWD.
Third, buyers can obtain the aforementioned “extended” title insurance policy that covers adverse possession claims. However, such policies are usually far more expensive than a regular title policy, and buyers will want a real estate lawyer to review the extended policy to make sure it actually does cover adverse possession claims. Of course, buyer and seller can negotiate who pays the cost of the extended policy and/or the lawyer’s review.
In the end, people should be aware of their rights and responsibilities when giving a SWD, including liability for an adverse possession claim. Buyers and sellers alike should consult a real estate lawyer to analyze their particular transaction well in advance of closing.