This article discusses a common trap triggered by people deeding properties or interests in real property. The issues created can arise from any form of deed used, but quit claim deeds are the most common form of conveyance used by individuals, so I will focus on that type of deed. It is not necessarily the form of deed itself that is problematic, but the failure to consider the long term consequences which a poorly thought out conveyance can engender.
I will outline the more prevalent problems we encounter from clients from the indiscriminate use of quit claim deeds. The comments are applicable to any conveyance between parties without legal or title company supervision, but my comments will assume the use of quit claim deeds.
The firm receives numerous calls from people who have quit-claimed property to friends, family, former partners or businesses and had done so without consulting a lawyer or title company before executing the deed. Now they want to know how a mistake can be corrected. I hope this note will be helpful to anyone considering a conveyance by this type of deed.
Quit claim deeds are perfectly legal and are covered in the property statutes, Title 33: Ariz. A.R.S. § 33-402 Forms for conveyances; quit claim; conveyance; warranty; mortgage
“1. To quit claim: For the consideration of ............, I hereby quit claim to A.B. all my interest in the following real property (describing it).”
Very basic, that’s why they are used so frequently for simple conveyances. The problems arise down the road when the original circumstances have changed, divorce, separation and split-up of relationships or death of one of the parties.
The most common situations presented are along the lines of “I put my boyfriend on title to my property because we 1) were in love and planned on getting married, or 2) he promised to make the payments on my mortgage and hasn’t done so, or 3) we split up and I have a buyer for my house but my ex won’t sign off on the contract, or 4) my business partner and I dissolved our partnership and he deeded his interest to me but the title company won’t issue a policy”. I could go on, but you get the point.
Bear in mind that the above problems can exist regardless of the type of deed used, the problems just don’t seem to come up as frequently where the parties have used a warranty deed.
With a warranty deed, the conveyor is warranting that he has good title to the property. That is why that form is used in conjunction with transfers handled by a title company. In fact, most title companies will not accept quit claim deeds and require corrections and a new special warranty deed. A warranty deed is more involved, and people deem it unnecessary in the simplicity of a friendly deal where no money changes hands, between sweethearts or friends. Therefore, the lure of a quit claim deed is appealing - no need for lawyers or title company expense.
May Need a Court Order to Resolve the Problem
In any event, a person calling my office because of one of the above-mentioned problems now wants to get the other person off the title and mistakenly believes “easy to get into, easy to get out of”. Unfortunately, this is not true. Once you have put another on title, without their agreement to quit claim back to you, you will have to file a quiet-title or partition (court order to sell) action to clear title. Having the court agree to remove that person from the title is not a foregone conclusion. You may have to sell the property under the court’s partition order and split the proceeds in an amount or proportion not to your liking.
An Example of Unforseen Consequences
There is nothing wrong per se with using a quit claim deed, it’s more the circumstances under which they are used that can cause later regret. For example, let’s look at a composite of rather common situations our firm has handled.
Jane Smith has great credit and has saved up funds for a down payment. She buys a house with a loan in her own name. Later, she meets a great guy, Tom Brown, and they become a couple. Tom is renting an apartment and eventually it only makes sense that he moves in with Jane. After a while, Tom feels it is unfair not to be a co-owner because they love each other, and, after all, Tom does the maintenance and repairs and shares the expenses. If Jane really loved him, Tom cajoles, she would put him on the title with her. So she quit-claims a half interest in her home to Tom.
Jane and Tom later split up and Jane moves out and quit claims her remaining interest to him. Tom promises to keep the loan current, pay the taxes and insurance, HOA dues, and pay her for her 50% interest when he refinances or sells the house. However, Tom loses his job, or simply turns out to be a deadbeat or jealous of Jane’s new life. For whatever reason, he stops making the loan and other payments.
Jane did not consider or know that the quit claim deed to Tom did not substitute him for her on the loan. As far as the lender is concerned, the loan remains in her name. All the notices go to the address on the deed of trust, not to Jane at her new address. Tom doesn’t want to face Jane, so he throws the late notices aside, leaving Jane to believe that the loan is current.
Now, there are two possibilities. Either Jane finds out about the delinquency or she does not. Maybe a next door neighbor sees the Notice of Trustee’s Sale posted on the front door and contacts Jane about it. If Jane never finds out about the default, legally, the trustee’s sale can be conducted without her ever knowing she has been foreclosed. Unless Jane provided her new address to the lender in writing, the lender can mail the notices to the address on the Deed of Trust and will be in compliance with the statutes. Receipt of the notice is not a legal requirement.
Typically, the home owner discovers the problem before the trustee’s sale, but at that point the amount of back payments to cure the default may be much more than the borrower can afford. In our example, Jane may have been alerted to the past due payments through her credit report or may have been turned down for credit that should have been granted, prompting her to pull her report. All of the past due payments will be reported against Jane’s credit since the loan remains in her name.
Jane’s credit is ruined and she may have lost her equity through the foreclosure, all because she wanted to be fair to Tom.
The above saga between Jane and Tom did not happen just because she used a quit claim deed, but used it without professional advice. Quit claiming was easy and seemed to resolve the tension between the parties. Of course, any form of deed in this fact situation would eventually have been problematic.
There are ways Jane could have satisfied Tom’s feelings of entitlement without jeopardizing her credit and legal position, but it requires documents drawn by a knowledgeable real estate practitioner, such as R Harvey Dye Law, PC.
The Jane and Tom example is but one illustration of how quit claim deeds can cause problems in the future. Since quit claim deeds are usually drafted by one of the parties without legal consultation, mistakes or omissions are made that can cloud title. Title companies consider quit claim deeds a red flag, and may require a new deed before issuing insurance. If either party is unavailable to sign a new deed or corrective document, the title may not be insurable, rendering the property virtually unsaleable short of solving the defect.
Any Deed of Conveyance Should State the Parties’ Marital Status
Many times the defect is omission of the marital status of the grantee and grantor, raising community property issues. “A conveyance or incumbrance of community property is not valid unless executed and acknowledged by both husband and wife . . .” A.R.S. § 33- 452
When a title search finds a quit claim deed from “Harry Jones” to “Sam Jackson”, a legal question is created as to whether Jones and Jackson had spouses at the time were and attempting to convey community property without a wife’s consent or signature. If Jones was married, and if the property was his alone, the deed should state from “Harry Jones, a married man, as to his sole and separate property”. Or, if not married, should state from “Harry Jones, an unmarried man”. Obviously, if Jones was married and conveying community property, the deed would have to be from Harry Jones and Harriet Jones, husband and wife.
Jackson’s marital status and how he is taking title should also be identified. For example, if Jackson was married at the time of conveyance, but the deed simply conveys to “Sam Jackson, Grantee”, the title company would look for a disclaimer deed signed by his wife, waiving any community property interest in the property. Absent the disclaimer of community interest, Mr. Jackson will be unable to convey clear title to a new buyer. Again, I am just touching the surface here simply to make the point that there are requisites to properly deeding real estate and that a failure to anticipate and provide for those requirements can be costly, either in a loss of value in the property or through the expenditure of attorney’s fees to quiet and clear title.
Anyone Can Quit Claim an Interest in Any Property, Whether He Owns it or Not
A quit claim deed only conveys the interest the grantor has in the property. “A quitclaim deed conveys to the grantee no greater rights to the property conveyed than the grantor possessed; it does not constitute a muniment [a document, as a title deed or a charter, by which rights or privileges are defended or maintained] of title.” Lake Havasu Community Hosp., Inc. v. Arizona Title Ins. and Trust Co. (App. 1984) 141 Ariz. 363, 687 P.2d 371
This means that someone can quit claim to you a property in which he owns no interest, or the interest is much less than what the seller represented. Without going through a title company and getting a title commitment, a fraudulent seller can claim any fictitious ownership he thinks he can get away with.
Of course, quit claiming an interest in a property where no such interest exists may be fraudulent. The point is, a quit claim deed does not create something from nothing. Mr. Slick can quit claim his neighbor’s house to you without in fact conveying any interest. If you paid for that interest, Slick has committed fraud.
However, a legitimate quit claim from someone who does not appear of record to have an interest is sometimes required to obtain a title insurance policy. A title search may show a possible adverse claim due to an historical technicality. Perhaps some shows up as a descendent of a relative who once owned the property but died without a will and there is no record of a probate case disposing of the property. A quit claim deed from the descendent will clear title by precluding his later assertion of an interest in the property.
Think before you convey. Call an attorney or a title company to make sure the conveyance will stand the test of time and not surface as an impediment to later transactions. Get the understanding in writing. Don’t let emotions or intimidation by a friend or romantic partner keep you from documenting why you are conveying and what happens if things do not work out as hoped.
Be aware that simply deeding the home to someone does not remove you from the loan obligations. Unless the new owner assumes the loan formally and you, the initial borrower, are removed by the lender, in writing and with new recordation to establish notice, any later default will affect your credit, and ultimately, your equity.