A deed is a legal vehicle that moves the ownership of a property from one individual or entity to another. There's more than one type of deed, and some protect the grantee—the person who's receiving the property—far more than others. A special warranty deed offers only limited guarantees. In fact, it's sometimes called a limited warranty deed.
What Is a Special Warranty Deed?
The grantor in a special warranty deed—the party who's selling or transferring the property—conveys it with just two warranties. She guarantees that she has received title, and she warrants that the property wasn't encumbered during her period of ownership.
The grantor effectively only warrants the title of the property against her own actions or omissions. She didn't personally take any action—or fail to take actions—that would affect the title. Also, no one else did anything to affect the title—at least during her period of ownership. She warrants against nothing that might have occurred or existed before her acquiring the property.
Warranty Deeds vs. Non-warranty Deeds
Some deeds offer no warranties at all, so a special warranty deed is at least one step above this type of deed, as far as protections are concerned. A non-warranty deed sometimes referred to as a quitclaim deed, simply states that the grantor is giving his interest in a property to the grantee.
There's actually a gray area between a non-warranty deed and a quitclaim deed, however. A quitclaim deed doesn't make any promises that the grantor actually has an interest in the property to grant. A non-warranty deed does guarantee that the grantor has something to convey, but it offers nothing more than that. Neither type of deed warrants that the current owner or anyone else has done anything to impede title.
Special Warranty vs. General Warranty Deeds
A special warranty deed is essentially a modification of a general warranty deed, and the term "special" doesn't mean that it's superior or better in any way.
The grantor provides an overall guarantee in a general warranty deed. He's warranting that there are no claims or encumbrances against the property at all—none arose during his ownership, and the property had a clear title at the time he purchased it as well.
By contrast, a special warranty deed only guarantees the property was free and clear during a limited period of time. It's not a common way to transfer property for this reason.
But a special warranty deed doesn't have to be limited to just these two guarantees. Other warranties can be conveyed if they're specifically stated in the deed—and both types of deeds guarantee that the seller holds the title and is free to sell the property in question. They also both hold the seller responsible for any undisclosed faults or damage to the property.
When Is a Special Warranty Deed Used?
Special warranty deeds are rarely used in residential property transactions between strangers for obvious reasons.
In the case of estate matters, however, the individual receiving the property generally has some comfort level and knowledge of the property's history, so these deeds are used more often in these situations. And properties are commonly transferred by the executor of an estate or the trustee of a living trust in these situations—neither of whom should be held liable for faults in the title because they never personally owned the property.
Sometimes the grantor can't make extensive warranties. A mortgage lender might not know the prior history of the house in cases where it's foreclosed on the property and is now offering it for resale. This can be a tricky situation because the very fact that the previous owners went into foreclosure indicates they were probably having some financial difficulties. They might have encumbered title, but they're not the individuals who are making a guarantee that they did not. The grantor in this situation would be the foreclosing lender.
As for commercial real estate transactions, these paths to ownership can be muddied by multiple owners, foreclosures, and other issues. These properties might have convoluted and extensive ownership chains, so it's more likely that special warranty deeds will be used in these situations.
An Example of the Pitfalls of a Special Warranty Deed
Let's say you've just found the property of your dreams and it's yours for a very reasonable price, but the seller wants to convey it to you by special warranty deed.
The previous owner—the one who held ownership prior to the current seller acquiring the property—failed to pay his property taxes for several years. The county has perfected a lien against the property for taxes due. The seller does not have to disclose this to you in a special warranty deed because he didn't incur the property taxes during his ownership period.
Payment of those taxes can, therefore, become your responsibility when you sign the deed. You're effectively taking the property "As-Is." The only way to remove the lien is to pay the underlying debt.
Real estate transactions can be complicated enough without worrying about what type of deed you're being asked to sign. Should you find yourself in the position of being asked to accept a special warranty deed, ask yourself why the grantor wants to conduct business this way. Then do your own research.
Your or your attorney can do a title search on the property to shed light on any issues that occurred before the current grantor took ownership. As a practical matter, your lender will want to see title insurance in place if you're financing the purchase. Title insurance approval requires a title search to uncover unknown liens and encumbrances.
What's in It for the Seller?
Of course, the seller or grantor of the property would logically prefer a special warranty deed. She doesn't want to be on the hook for any more promises or guarantees than is absolutely necessary. As the seller, you're always free to try to negotiate for a special warranty deed, but don't expect the buyer to agree.
The purchase agreement should clearly define the type of deed to be used, and it typically cannot be changed at the last minute at the settlement table.