Question

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Consider an owner who encumbers their real estate with a first trust deed lien. The owner then sells the property to a buyer who agrees in the purchase agreement and escrow instructions to take title subject to the first trust deed.

Title is conveyed by grant deed to the buyer. However, the grant deed does not note the title is subject to the first trust deed created by the owner.

Later, the property is resold by the buyer. The purchase agreement and the escrow instructions for the resale disclose the existence of the first trust deed — specifically, the remaining balance on the first trust deed note to be assumed as part of the terms for payment of the purchase price on the resale to the new buyer.

The grant deed for the resale states the new buyer will take title subject to all encumbrances of record.

Later, on a search of the record title, the new buyer discovers the first trust deed lien they took over was not referenced in the grant deed conveyance to the seller from the prior owner of the property who created the trust deed lien.

The new buyer seeks to recover money from the prior owner for the amount of the debt secured by the trust deed based on the prior owner's breach of the implied covenant against encumbrances. The new buyer claims they have suffered losses since the trust deed created by the prior owner was not referenced in the prior owner's grant deed when they sold the property

Is the new buyer entitled to recover money losses from the prior owner for the breach of the implied covenant against encumbrances contained in the grant deed?

Answer 1

The new buyer would likely not be entitled to recover losses for the breach of the implied covenant against encumbrances, as they had knowledge of and agreed to take title subject to the first trust deed lien.

Step-by-step explanation:

The issue presented is whether a new buyer can recover losses from a prior owner for a breach of the implied covenant against encumbrances, specifically regarding a trust deed lien not mentioned in the grant deed from the prior sale. If a covenant against encumbrances is implied in a grant deed, it typically ensures that the property is free from liens or claims when conveyed, unless otherwise noted in the deed.

However, in the described scenario, the buyer agreed to take the property subject to the first trust deed and later resold it with reference to the first trust deed, expecting the next buyer to also assume it. Therefore, it would be challenging for the new buyer to claim they were unaware of the encumbrance and seek redress for this specific implied covenant breach.