Limitations on Covenants in General Warranty Deeds

The covenant language in a typical general warranty deed, which reads as follows:

“GRANTOR WARRANTS AND FOREVER DEFENDS, ALL AND SINGULAR THE SAID PREMISES UNTO THE SAID GRANTEE, AGAINST EVERY PERSON WHOSOEVER LAWFULLY CLAIMING, OR TO CLAIM THE SAME, OR ANY PART THEREOF”

seems straightforward and ironclad. However, in a recent Texas Court of Appeals opinion issued on September 25, 2014, in which our own Kyle Dickson successfully represented the appellant (Grantor), the Court placed two significant restrictions on the covenant to warrant and forever defend. Stumhoffer v. Perales, No.01-12-00953-CV, (Tex. App.-Houston [1st Dist.] 2014, rev’d and remanded).

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The trial court initially held that Grantor’s covenant to defend included attorney’s fees and costs and granted summary judgment in favor of Grantee. With $75,000 at stake, Grantor appealed.

WHAT HAPPENS WHEN THE GRANTOR DECLINES TO DEFEND A LAWSUIT OVER THE TITLE TO THE PREMISES?

The trial court held that, in that situation, the Grantor waived any right to object to the manner in which the Grantee handled the defense of the action. Moreover, if Grantee lost title to any part of the Premises, then Grantor would be liable to Grantee for the fair market value of the portion of the Premises so lost. Ironically, Grantee prevailed in the lawsuit and, thus, Grantor incurred no liability under the general warranty deed.

The lesson is that grantors decline to defend title claims at their own peril.

DOES GRANTOR HAVE AN OBLIGATION TO INDEMNIFY GRANTEE FOR GRANTEE’S ATTORNEY’S FEES ASSOCIATED WITH DEFENDING TITLE TO THE PREMISES?

The Court of Appeals reasoned that, if there had been a failure of title to the Premises, Grantee’s damages would not have included attorney’s fees absent a question of fraud, imposition, or malicious conduct involved. The Court also distinguished several cases in which grantors made additional promises specifically relating to the payment of a grantee’s attorney’s fees, stating no such promise was made in this case. The Court concludes that attorney’s fees are recoverable in Texas only when an agreement between the parties so provides.

The Grantee was also unable to recover attorney’s fees based on a breach of contract because Grantee’s defense of title to the Premises was successful and, therefore, no breach occurred.

As a result of this ruling, a grantee has two options. First, the grantee should get a specific written agreement with the grantor concerning attorney’s fee reimbursement before defending title. If the grantor refuses, the grantee has to weigh the cost of defense against the fair market value of the premises in dispute.

In the case before the Court, one hopes that the Grantee is satisfied that retaining the additional seven feet width of Grantee’s Premises was worth the $75,000 expended in attorney’s fees.

A Look Into Statutes of Limitations

Question: When is the four-year statute of limitations for suit on a debt not governed by the four-year statute of imitations?

Answer: When there is a foreclosure of real property involved.

In a case of first impression, the 14th Court of Appeals in Houston has ruled that following a non-judicial foreclosure sale, the four-year limitations period for breach of a personal guaranty is extended so that the limitations period ends two years after the date of the foreclosure sale.

Prior to this decision by the 14th Court of Appeals, there was a conflict in the limitations period in Section 16.004 of the Texas Practice & Remedies Code and Section 51.003(a) of the Texas Property Code.

Section 16.004 of the Texas Practice & Remedies Code provides that suit must be brought not later than four years after the day the cause of action accrues on a debt. An action on a promissory note and guaranty would normally be governed by this statute.

Section 51.003(a) of the Texas Property Code provides that any action brought to recover a deficiency must be brought within two years of the foreclosure sale.

This is what happened in the case of Sowell v. International Interests, 416 S.W. 3d 593 (Tex. App. [14th Dist.] 2013). On May 30, 2002, DSI–HP 2002, Ltd. (“DSI”) executed a promissory note payable to Bank One, N.A. (“Bank One”) in the original principal amount of $12,823,000 (the “Hobby Place Note”). The Hobby Place Note was secured by a Construction Deed of Trust recorded against a 596–unit apartment complex located at 11911 Martin Luther King, Jr. Blvd., Houston, Texas 77048 (the “Hobby Place Property”). The same day, Donald W. Sowell (“Sowell”) executed a Guaranty Agreement for the benefit of Bank One guarantying repayment of the Hobby Place Note and all renewals, rearrangements, and extensions thereof (the “Guaranty”).

The loan matured on November 30, 2004, and neither DSI nor Sowell paid the Hobby Place Note. On February 6, 2007, three years after the maturity of the Hobby Place Note, the lender (assignee of Bank One) conducted a non-judicial foreclosure, leaving a deficiency of over $8 million. The holder of the Hobby Place Note (assignee) then filed suit on February 4, 2009, five years after the maturity date of the Hobby Place Note.

The cause of action accrued on November 30, 2004, when the Hobby Place Note matured and was not paid. One would think that the holder of the Hobby Place Note must being suit within four years from that date (November 20, 2008). However, under Section 51.003(a) of the Texas Property Code, the holder of the Hobby Place Note must being suit within two years of the foreclosure sale. That bar date would be February 6, 2009.

Therefore, the limitations period against Sowell did not run until February 6, 2009, five years after the maturity date of the Hobby Place Note. In affirming the trial court’s judgment, the Court held that “[u]nder Section 51.003(a), the limitations period for [DSI’s] claims against Sowell under the Guaranty expired two years after the date of the foreclosure sale [February 6, 2007]. Because [DSI’s] filed suit within this period [February 4, 2007], the trial court did not err in concluding that International’s claims against Sowell were not barred by statute of limitations.” Sowell, 416 S.W.3d at 602.