Little Law, Big Deal

Effective Sept. 1, 2021, S.B. 885 adds only 78 words to Texas codes and barely fills half a page, yet this little bitty bill could have a significant impact on Texas real estate transactions.

To understand how the changes work, one must look at the existing law relating to quitclaims. This will include a quick detour to explore bona fide purchasers. Start with the following example.

In 2012, Larry owned a 500-acre ranch. In 2015, he divided it into five 100-acre tracts. Larry kept Tract 5 for himself; Tracts 1-4 were sold as follows:

• Tract 1 to Ty, giving Ty a general warranty deed, which was promptly recorded.
• Tract 2 to Casey, giving Casey a general warranty deed, which was not recorded.
• Tract 3 to Lane, giving Lane a quitclaim deed, which was promptly recorded.
• ​Tract 4 to Tuff, giving Tuff a quitclaim deed, which was not recorded.

On Aug. 12, 2021, Larry sold the entire 500-acre ranch to Freckles, giving Freckles a general warranty deed, which was recorded on Aug. 31, 2021.

Now, Larry has sold some of the same land more than once and to different people, which certainly exposes Larry to liability, but that’s a topic for another day. What happens when everyone else finds out? They end up at the courthouse, of course, and the dispute involves the concept of the bona fide purchaser.

Conveyances of real property definitely
should be recorded in the county deed records, because they provide constructive notice of their existence.

​​​​​For example, Ty’s recorded general warranty deed gives constructive notice “to the world" that Tract 1 was conveyed to Ty. It matters not whether anyone actually checks the deed records and actually knows the deed is there. Nevertheless, a properly executed deed, delivered to the grantee, even if not recorded, is sufficient to convey title.

However, Tex. Prop. Code § 13.001(a) says an unrecorded conveyance of real property is void as to a subsequent purchaser for a valuable consideration who takes in good faith and without notice of the prior conveyance. Such a subsequent purchaser is called a bona fide purchaser. An unrecorded deed is still binding on a subsequent purchaser who does not pay a valuable consideration or who has notice of the conveyance, according to Tex. Prop. Code § 13.001(b). The notice may be actual or constructive.

Actual notice means the purchaser actually has personal knowledge. A person is also charged with notice of those facts that a reasonable inquiry would have disclosed. For instance, if Casey is using the land in a way that should alert Freckles to his conflicting claims, then Freckles would be on notice of the competing claim and could not be a bona fide purchaser. Constructive notice means the law imputes notice to the purchaser even if he does not have actual knowledge. The most common example of constructive notice is that given by a recorded deed.

In the battle for Tract 1, Freckles cannot be a bona fide purchaser because Ty’s deed is recorded, constituting constructive notice to Freckles. Thus, Ty will prevail. In the Tract 2 lawsuit, however, Casey’s deed is unrecorded, and Freckles is a bona fide purchaser. Freckles will win on Tract 2. For purposes of the illustration, Freckles gave adequate consideration for the ranch and has no actual knowledge of the previous conveyances.

To examine the cases of Tracts 3 and 4, the quitclaim deed must be introduced.

Former Baltimore Orioles manager Earl Weaver once quipped, “There’s a place for the sacrifice bunt, and it’s deep in your closet." The same could be said for the quitclaim. Clients often ask lawyers for quitclaim deeds or sometimes “quick claim deeds." In most cases, though, using a quitclaim deed is a bad idea. When should a quitclaim be used in Texas? The answer is almost never.

The term
quitclaim deed is something of a misnomer because it’s not exactly a deed. A deed is an instrument in writing that, when properly executed and delivered, conveys title to real property. A quitclaim doesn’t necessarily do that. The term “quitclaim," however, is appropriate. A quitclaim does exactly what it says. It quits a claim. In other words, it is a disclaimer in which the grantor releases his claim in favor of the grantee.

A quitclaim does not establish title in the grantee. It does not contain words of conveyance or warranty. It merely passes whatever interest, if any, the grantor has at the time the quitclaim is made and delivered (unless the language shows the intent to pass something other than the grantor’s then-existing interest). Thus, if the grantor has no interest in the property, the quitclaim conveys nothing.

The courts determine whether an instrument is a conveyance or a quitclaim based on the wording of the document. If the document demonstrates an intent to transfer the land itself, it is a conveyance. If it indicates an intent only to relinquish the right, title, and interest of the grantor, if any, then it is a quitclaim. This is true regardless of the title of the document and regardless of whether it includes the word “quitclaim." See, e.g.,​ Porter v. Wilson, 389 S.W.2d 650 (Tex. 1965).

A general or special warranty deed conveys title
andwarrants the title. A deed without warranty conveys title but does not warrant title. A quitclaim merely relinquishes the grantor’s interest, if any, to the grantee. If the grantor has title at the time of the execution and delivery of the quitclaim, it operates as a conveyance, but it creates a problem in the chain of title.

Because a quitclaim only passes the interest presently owned by the grantor, quitclaims “are commonly used to convey interests of an unknown extent or claims having a dubious basis." Id. at 655. Therefore, a quitclaim in the chain of title is considered legal notice to a purchaser that another person may have a claim on the property. Richardson v. Levi, 67 Tex. 359, 3 S.W. 444 (1887). This doubt is never removed from the title. It stays in the title chain and is imputed to all subsequent purchasers. All subsequent purchasers take title subject to whatever claims might be out there.

Because the quitclaim is considered legal notice of a potential claim, the purchaser in this situation cannot be a bona fide purchaser. If the owner of a prior unrecorded interest comes forward, the purchaser is at risk of losing the property or at least is saddled with the hassle and expense of defending it. This creates an uncertain and unmarketable title and can make it difficult to obtain title insurance. There has never before been a good way to fix this problem under Texas law.

Back in the courthouse, where title to Tracts 3 and 4 are being litigated, the deeds from Larry to Lane and Tuff are quitclaims. They still operate to transfer Tracts 3 and 4 to Lane and Tuff. But remember, an unrecorded conveyance of real property is void as to a subsequent purchaser for a valuable consideration who takes in good faith and without notice. With respect to Tract 4, Freckles will prevail over Tuff’s unrecorded quitclaim. But Freckles will lose Tract 3 to Lane because Lane’s recorded quitclaim is constructive notice to Freckles.

Now, look at the example again, but this time assume Larry’s deed to Freckles was a quitclaim made and delivered on Aug. 12, 2021, and recorded on Aug. 31, 2021. Freckles is back in the courthouse fighting over the title.

The quitclaim is effective to transfer title to Tract 5 from Larry to Freckles. After all, Larry did own it, and he quitclaimed it directly to Freckles. Note, however, that no one claiming Tract 5 under Freckles in the future may be a bona fide purchaser. As to Tracts 1-4, Freckles cannot be a bona fide purchaser because the quitclaim itself is notice. No one claiming under Freckles in the future can ever be a bona fide purchaser in this scenario.

The Commission of Appeals lamented the sometimes harsh results of this rule:

We therefore regard the question as settled in this state until such time as the legislative branch of the government may deem it in the interest of public policy to change the rule by statute.
Houston Oil Co. of Texas v. Niles, 255 S.W. 604, 610 (Tex. [Comm’n Op.] 1923).

​​​​That time is now.​​​​