This is not legal advice. For legal advice, consult an attorney in person, not a blog.
In most instances, a buyer will take title to the property by a statutory warranty deed. As the name implies, this deed is defined by statute. That said, this statute merely codified the common law, which evolved over several hundred years (beginning in medieval England).
In any event, a statutory warranty deed includes several warranties, or promises, from the seller:
(1) That at the time of the making and delivery of such deed he was lawfully seized of an indefeasible estate in fee simple, in and to the premises therein described, and had good right and full power to convey the same; (2) that the same were then free from all encumbrances; and (3) that he warrants to the grantee, his heirs and assigns, the quiet and peaceable possession of such premises, and will defend the title thereto against all persons who may lawfully claim the same.
Given that this is pretty dense “legalese,” I’ll summarize: When a seller conveys title by statutory warranty deed, the seller warrants to (or promises) the buyer: (1) that the seller was the sole true and legal owner of the property; (2) that the seller had the legal authority to pass title to the buyer; (3) that the property is free from all encumbrances; (4) that the buyer’s ownership of the property will not be challenged; and (5) that the seller will defend the buyer’s claim of ownership if challenged. If one of these warranties is breached, then the seller will be liable to the buyer under the terms of the deed.
Of particular importance, a seller makes these warranties and will be liable for their breach even if the buyer knows of the breach at the time of conveyance. If the seller wants to limit these warranties and to exclude certain known breaches (for example, a known encumbrance), then the seller must do so in the deed itself. This is accomplished by a “subject to” clause in the deed.
If the deed does not identify an existing encumbrance in a “subject to” clause, then the seller faces liability immediately upon closing. For example, assume the seller and buyer are both aware of the fact that the neighbor’s fence encroaches five feet onto the property. Moreover, everyone knows that the fence has been there for 20 years. Thus, everyone knows that the neighbor has a very good adverse possession claim (i.e., the neighbor has a good claim that he has taken ownership of the portion of the property on his side of the fence). Regardless, unless the deed specifically excludes this claim from the warranties within the deed, the seller will still be liable to the buyer for this claim. The seller would have to pay for any defense of the buyer’s title (i.e., attorney’s fees and costs of litigation), and if the neighbor had taken title to the area then the seller would have to compensate the buyer for the resulting loss in value.
Thus, it is important that the deed by which the seller conveys title correctly excludes from the inherent warranties those defects on title that are known and exist at the time of closing. Of course, a buyer may object to a “subject to” clause that includes the known defect (such as the fence and adverse claim in the hypothetical above) because the purchase and sale agreement requires the seller to resolve such encumbrances. But if the seller simply folds on the issue and warrants against the encumbrance, the seller is not doing himself any favors. Rather, certain liability will result.