A warranty deed doesn’t always convey everything

Lawyers are taught in law school that ownership of land carries with it a bundle of rights. A warranty deed conveys “fee simple absolute” title, which is the full bundle of rights. A person who obtains title by a warranty deed gets 100% of the rights associated with the piece of land described in the deed, other than what is excepted by the language of the deed, such as recorded restrictions and easements.

But Missouri courts have recognized a hole in this rule: some rights associated with real estate are personal property, not real property, even though the rights have to do with real estate. The warranty deed does not necessarily convey these rights, even though the warranty deed says that it is conveying all “rights, privileges, interests and appurtenances” that go with the land described.

Unless the special rights are specifically identified in the deed or another document of assignment, a court can require a trial to determine whether the person who signed the deed intended to convey them. Most lawyers don’t know about this quirk, and it can bite their clients real hard.

Here’s an example from a July 16, 2009 decision of the Missouri Court of Appeals, Southern District, in the case RGB2, Inc. v. Chestnut Plaza, Inc.:

Cherokee Investments, Inc., bought a commercial lot in Springfield in February 1992, hoping to put a Hardee’s restaurant on it. The purchase contract stated that the seller would record a restriction in the county records prohibiting the use of any other lot then owned by seller for a hamburger restaurant within 2,000 feet of the lot Cherokee bought.

Cherokee was a corporation entirely owned by Ron, but Cherokee and Ron could not get the financing to build a Hardee’s. Ron and some investors formed a new corporation, RGB2, Inc., and Cherokee signed a deed conveying the lot to RGB2 on May 4, 1992.

Somebody else bought a lot within 2,000 feet of RGB2’s lot and opened up a McDonald’s restaurant. RGB2 sued the seller of that lot, claiming that the seller had breached the restriction contained in the contract with Cherokee by not recording a restriction on the lot now occupied by McDonalds.

The seller claimed that RGB2 didn’t have the right to sue the seller: the seller’s contract was with Cherokee and not assigned to RGB2. RGB2 did not “own” the seller’s promise to protect the Hardee’s lot from competition.

At the trial, RGB2 produced a document called an assignment, with an effective date of May 4, 1992, which stated that Cherokee was assigning its rights to enforce the contract between Cherokee and seller.

But on the witness stand, Ron confessed that he signed the assignment after he signed the deed conveying the lot from Cherokee to RGB2, admitting that he didn’t specifically intend when he signed the deed that he didn’t understand that a separate assignment of the right to enforce the contract with seller was necessary. The trial judge ruled for seller, and the court of appeals affirmed.

The Missouri Supreme Court has not considered this issue. The rule of law in Missouri comes from the Eastern District Court of Appeals in two opinions involving the same dispute over the Ranch Roy-L subdivision in 2005 and 2007  (182 SW3d 267 and  242 SW3d 401). Initially, the trial court granted summary judgment, stating that the warranty deed for the unsold lots in the subdivision did not convey the rights of the developer to the purchaser of those lots. Citing opinions from Illinois, South Carolina, and Vermont, the court concluded that the rights of a developer are personal property, not running with the land, and do not pass with a warranty deed unless that was the intent of the parties. The appeals court reversed the summary judgment and sent the case back for a trial. At the trial, the judge heard and believed evidence that the original developer did intend to convey the developer’s rights when he signed the warranty deed.

While this rule of law may be favored by most state appellate courts that have considered it, it has some flaws.

• A basic rule of law is that evidence outside the wording of a deed is not admissible unless the deed is ambiguous or there is evidence that it was obtained by fraud. If a deed says that it conveys all rights associated with ownership, then a court shouldn’t be able to carve out exceptions.
• The rights that a developer has over subdivision lots or acreage “touch and concern” the land, and according to this criterion would “run with the land.” Similarly, the promise that Cherokee got when it bought the lot that the seller wouldn’t allow a competing restaurant seems also to touch and concern the land.
• It shouldn’t be necessary to have a trial to determine the intent of the parties when a deed is unambiguous. But under the rule of Ranch Roy-L, persons preparing deeds have to make sure that the deed or other instruments reflect the conveyance of anything a court might later consider to be personal.

Now I am going to argue the other side. In the case of RGB2 and Ranch Roy-L, the persons who claimed that the deeds did not convey the right to enforce the contract on the developer’s land were ambushed, at least in a way.

RGB2’s seller was obligated under the original contract with Cherokee Investments to create and record another real estate document to prohibit the use of other lots for a hamburger joint. However, the seller didn’t record anything, so other people (such as the McDonald’s franchisee) purchased a lot without notice of any restriction. Cherokee might have been able to enforce the contract, but Cherokee became defunct without having asserted its rights. The court wasn’t going to require the seller to compensate RGB for damages caused by McDonald’s when Cherokee could have done so before any other parties were involved.

In the Ranch Roy-L situation, other parties might have bought lots in the subdivision who would have had no idea that there was a new developer who could exercise the rights that developer often reserve in subdivision documents, such as the right to monkey with lot boundaries, add additional lots to the subdivision, use subdivision streets for access to other subdivisions on adjacent lots, to be exempt from assessments for streets maintenance, etc.

In both cases, the appellate courts wanted the trial courts to hear all the facts before deciding whether a plaintiff could enforce rights that would affect persons who did not sign a contract with the plaintiff. In this way, the judicial system exercises a great deal of care before affirming rights of parties who were somewhat careless in their actions.