Real Estate 101: Breach of general warranty covenants can be costly mistake

A common form of conveyance when selling real estate is the general warranty deed. With a general warranty deed, not only does the seller transfer title to the property, but also promises that she has good, marketable title and will defend any claims against the property otherwise.

For example, if you sell property using a warranty deed and there is an unpaid lien against the property, you must either pay an attorney to defeat the lien, or you must pay off the lien. Failure to do so is a breach of the warranty; and will entitle the buyer to damages, and attorney fees. Read more about types of deeds here.

Hollon v. Abner (1997 WL 602968), a 1997 Hamilton County Court of Appeals case, illustrates the point precisely. The sellers failed to account for tax liens that had attached to the property during the brief time that the property was in their son’s name.

The Abners came to own the property when their son, under contract to purchase the property, was unable to complete the purchase. The Abners stepped in and gave him the money to complete the purchase. Title transferred to the son’s name, and he immediately transferred the property into the parents’ names. But just that one moment during which the property was in the son’s name was enough for IRS liens for the son’s unpaid taxes to attach to the property.

After owning the property for five years, the Abners sold the property to Hollon (by general warranty deed). When Hollon later tried to sell the property, a title report the buyer insisted on revealed the tax liens.

In order to complete the closing, Hollon was forced to place over fifteen thousand dollars in escrow. Despite repeated demands from Hollon, the Abners refused to either defend against or pay off the liens. Eventually, Hollon brought suit against the Abners for breach of warranty, because the title they transferred to him was not free of encumbrances, and the Abners refused to defend or pay off the liens.

Hollon was granted summary judgment against the Abners, and the trial court ordered the Abners to pay damages in the amount of the tax liens, plus the escrow fees, and Hollon’s attorney fees.

While it is generally understood that attorney fees are only awarded in a breach of warranty claim where the buyer incurred attorney fees in defending against the lien, in this case, the Court Appeals ruled that that the trial court’s award of attorney fees was appropriate because Hollon only incurred fees because the Abners both failed to convey marketable title, and refused to defend or pay the liens; that is, it was only because of the Abners’ failure to live up obligations that the lawsuit was necessary.

The lesson being, if you sell real estate via general warranty deed and the buyer later contacts you regarding a lien that had attached before you sold the property, live up to your obligations before the court forces you to.