What Happens When a Covenant of Warranty is Violated?
A covenant of warranty, a key element in real estate transactions, guarantees the grantor's (seller's) right to convey the property and its freedom from encumbrances. When this covenant is violated, significant legal repercussions can arise for the grantor. Understanding these consequences is crucial for both buyers and sellers involved in property transfers.
What is a Covenant of Warranty?
Before diving into the consequences of a violation, let's clarify what a covenant of warranty entails. It's essentially a promise from the seller to the buyer, ensuring that:
- The seller has the right to sell the property: This means the seller legally owns the property and has the authority to transfer ownership.
- The property is free from undisclosed encumbrances: This covers things like mortgages, liens, easements, or other claims that could affect the buyer's full use and enjoyment of the property. The seller warrants that they are not aware of any hidden issues.
What Happens if the Covenant of Warranty is Broken?
A breach of the covenant of warranty occurs when the seller's promises are untrue. For example, if the seller didn't actually own the property or if there were undisclosed encumbrances that negatively impact the buyer, the covenant is violated. The ramifications for the grantor can be substantial:
1. Eviction or Legal Action: If a third party successfully claims ownership of the property or asserts a valid claim to a portion of it (due to an undisclosed encumbrance), the buyer can sue the seller for breach of covenant. This could result in the buyer's eviction or loss of property rights.
2. Financial Compensation: The buyer is usually entitled to financial compensation from the seller to cover the losses incurred due to the breach. This can include:
- Purchase price reimbursement: The buyer may be able to recover the purchase price they paid for the property.
- Legal fees: Expenses related to legal action against the seller are generally recoverable.
- Damages for lost use and enjoyment: If the buyer cannot fully use the property due to the encumbrance, they may receive compensation for this loss.
- Costs to resolve the encumbrance: If the buyer has to spend money to clear the title or resolve the encumbrance, the seller will likely be responsible for those costs.
3. Specific Performance: In some cases, a court might order the seller to take specific actions to remedy the breach, such as clearing the title or securing the buyer's ownership.
What if the Seller Wasn't Aware of the Encumbrance?
Even if the seller acted in good faith and was unaware of the encumbrance, they can still be held liable for breach of covenant. This is because the covenant guarantees the absence of encumbrances, not just the seller's knowledge of them. However, the seller might have a recourse against a previous owner or other party responsible for the hidden encumbrance.
Different Types of Deeds and Covenants
The strength of the covenant of warranty varies depending on the type of deed used in the property transfer. A general warranty deed offers the strongest protection to the buyer, while other types of deeds offer less comprehensive warranties.
How Can Buyers Protect Themselves?
Buyers can protect themselves by:
- Conducting a thorough title search: This helps to identify any potential encumbrances before the purchase is finalized.
- Obtaining title insurance: This insurance policy protects the buyer from losses due to title defects or encumbrances not discovered during the title search.
- Reviewing the deed carefully: Understand the type of deed and the extent of the warranties it provides.
- Seeking legal counsel: An experienced real estate attorney can advise on the transaction and protect your interests.
In conclusion, a breach of the covenant of warranty can have severe consequences for the seller. Buyers should take proactive steps to protect their investment and understand the implications of this crucial part of a real estate transaction. Seeking professional legal advice is highly recommended for both buyers and sellers to fully comprehend their rights and obligations.
