The rights and restrictions that come with a real estate purchase can be complicated. The “subject to” phrase means the full story may not be visible within the four corners of a deed.
Look for the phrase “subject to” in a deed. The deed might say: “Subject to all rights of way, easements and other encumbrances of record…” The deed is a grant of the land, but not every contingency appears on its face.
Most home buyers receive warranty deeds, which represent the real estate title as clear of creditors’ claims and other people’s ownership interests. Still, some rules and encumbrances can legitimately apply to the property. Yet they might be dealbreakers for the prospective buyer. Is there, for example, a utility company’s easement that could rule out a new deck, swimming pool, or accessory dwelling unit?
Homeowners’ associations have governing documents, containing rules about landscaping and so forth. And for a single home, the “subject to” clause is a catchall that spares the deed from reciting long, intricate property descriptions that were hallmarks of deeds in earlier times: the measurements and directions, setbacks, wells, driveways and sewer lines, and other parties’ long-recorded rights and responsibilities regarding shared resources. A general plan of development contains those restrictions.
The Importance of Reviewing a Title Insurance Policy Prior to Closing
If a purchaser takes the deed “subject to” recorded restrictions, they are binding on the buyer.
The lender’s title policy includes a property description and sets forth any restrictions found during the title search. The restrictions are exempted from the insurance policy’s coverage—meaning the policy does not cover these recorded limitations. So, if the proposed policy reveals dealbreakers, the prospective buyer needs to notice them before deciding to buy the real estate. If a dealbreaker exists, but the title company never found it, the homeowner might have a viable insurance claim.
This brings us to why a home buyer might purchase an owner’s policy for the real estate, too. If the buyer bought a property with an unknown encumbrance, or if someone comes along and claims an interest in the property, title insurance exists to make the policy holder whole. If the policy is the owner’s, the title insurance company might be able to bring a court action on behalf of the homeowner in order to remove the defect or pay the owner for the loss of value.
Litigation: When the Conveyance Is “Subject To” an Easement
A piece of real estate may be “subject to” shared driveways and walking paths, or passages granted to utility companies for electric lines, gas lines, or sewer pipes. Easements can be small or large. They can range from a trailway granted to the local hiking club for a season, to a continual right to maintain water pipes.
If a person buys the land without grasping just how intrusive the easement is, or if a “subject-to” clause creates ambiguity in property deed, the restriction might cause conflicts for the new owner and the matter may end up being hashed out in court.
A court would likely start with the assumption that by taking ownership of a deed “subject to” certain restrictions of record, the buyer condoned the restrictions, which therefore must be enforced. On the other hand, a court might determine that while the “subject to” clause does give notice to the buyer of restrictions of record, it doesn’t mean those restrictions are legitimate.
Should the property plan leave out the magnitude of the restriction, it could be argued that the buyer did not accept the easement to the full extent that it exists, and that an insurance policy holder never agreed to an encumbrance whose scope could not have been anticipated.
In the case Corrigan v. Illuminating Company, the electric company wrote to the Corrigans, advising them that would dispatch tree experts to their Ohio property to remove a tree the company deemed too close to the power lines. The Corrigans objected to the planned tree removal, and neither side backed down. The Corrigans wound up in court, seeking an injunction to stop the tree removal. They won the injunction. They also withstood an appeal by the power company. Yet their victory didn’t come cheaply, and it took four years. All because of an ambiguous easement that didn’t specify how close the trees had to come to the power line for the company’s authority under the easement to come into play. And the homeowners could just as easily have lost their case.
Buying a Home “Subject to” an Existing Mortgage Loan
The transfer of a deed might be “subject to” a number of home-specific restrictions, special conditions, or financial contingencies, too. Buying “subject to” a mortgage loan is an example—and it’s not the same as assuming the loan. Let’s review the differences here.
Subject to a Mortgage (or Deed of Trust)
A new owner might receive the title “subject to” an existing mortgage. If so, the mortgage stays on the property, in the seller’s name. Its balance is taken out of the purchase price.
While the buyer will now start making the monthly payments, ultimately, resolving the debt affects the seller’s credit rating. Should the mortgage ever fall into delinquency, it’s the seller—the original borrower—who is named on any foreclosure action. So, why would a seller leave their credit in the buyer’s hands? The seller might do this as a debt relief strategy. If all goes well, the seller’s credit rating will be bolstered as the new property owner makes regular mortgage payments. Come tax time, the seller will get to write off the mortgage interest.
When a property conveyance is “subject to” an existing deed of trust (in some states), the mortgage lien, through the deed of trust that secures it, stays on the home for the new owner to pay. The deed from the seller states that the buyer takes the property “subject to” the existing deed of trust. Here again, as long as the buyer makes timely payments, the seller’s credit rating stands to benefit.
When the new owner arrives on the scene, could the lender deploy the trust deed’s due-on-sale clause? Yes, and in that case the buyer will need to be prepared to pay off the entire mortgage. A lender might avoid exercising this clause if payments keep coming—especially as current interest rates are so low that ending older mortgages bring no advantages to the lender.
Assuming an Existing Mortgage
The “subject to” scenario differs from the situation in which the buyer agrees to assume the existing loan. To take over the seller’s mortgage loan, the buyer has to be approved, and the buyer’s credit standing changes accordingly. Once a buyer qualifies and assumes a mortgage, the original borrower is off the hook, and it’s the new homeowner who would be named in the event of a foreclosure.
Can Property Be “Subject to” Unenforceable Restrictions?
“Real covenants” in deeds run with the real estate. To be enforceable, they must be reasonable, unambiguous, legal, and not contrary to public policy.
What if there are conflicting deed restrictions? What if, for example, zoning ordinances conflict with a covenant in the developer’s plan? Expect the stricter rule to be held valid. For instance, if a subdevelopment is recorded as exclusively residential, the town cannot nullify that restriction by introducing commercial zoning.
Finally, there is nothing parallel to a statute of limitations on deed restrictions. Unless a real covenant by its own terms expires at a certain point, the restriction it imposes will never end. It will bind every subsequent buyer who takes the deed “subject to” the restriction. Unconstitutional discrimination in a deed restriction, though, is not enforceable today.
Know Your Deed—Inside and Out
Today’s home sales involve heaps of closing documents, and most buyers are anxious to sign them quickly. Yet some buyers have legal experts review the sale agreement, the deed, and the title search results. A wide range of title claims can be discovered by the title insurer, and a real estate lawyer who reviews the documents can provide invaluable support in negotiations and purchase decisions.
A home is a major investment, fraught with emotions as well as financial obligations. It’s always good to know what conflicts could arise in the future—before arriving at the closing table.
References
Chuck Szypszak, “This Deed is Subject to … Huh?” (Feb. 1, 2010) published by Coates’ Canons (UNC School of Government); available at: https://canons.sog.unc.edu/this-deed-is-subject-to-%E2%80%A6-huh/
Texas A&M Real Estate Center: “Living with Deed Restrictions” (undated); available at: https://texaslawhelp.org/article/living-with-deed-restrictions
David A. Weatherbie, 24th Annual Robert C. Sneed Texas Land Title Institute Case Law Update (2014); available at: https://www.tlta.com/documents/A_2014_CaseUpdate.pdf
Krugliak, Wilkins, Griffiths & Dougherty Co., “Is Your Property Subject to an Easement?” (Aug. 8, 2008); available at: https://www.kwgd.com/is-your-property-subject-to-easement
SFGate, “What Does Subject to Existing Deed of Trust Mean?” (undated); available at: https://homeguides.sfgate.com/subject-existing-deed-trust-mean-73697.html
And as linked.
Photo credit: Michael Pfister, via Unsplash.