Tuesday, July 10, 2012

Beware: Adverse Possession Risk Lingers After Sale of Property

So you are selling a property and a neighbor may have an adverse possession claim.  After closing, that claim is the buyer's problem, right?

Wrong.

The Washington Supreme Court recently reminded property owners of that conclusion in its decision in Edmonson v. Popchoi, 172 Wn.2d 272 (2011).

In Washington, the most common form of deed - the deed that is required by most purchase and sale agreement forms - is the "statutory warranty deed," defined in RCW 64.04.030.  Among the statutory warranties flowing from that form of deed is the warranty that the grantor (seller) will "defend the title" to the the property "against all persons who may lawfully claim the same."  Since an adverse possessor is a lawful claimant, a seller warrants against adverse possession claims.  Because the obligation to defend is based on a written contract (the deed), the obligation lasts for the duration of the six-year statute of limitations for written contracts.

Popchoi purchased property from Kiss with the intent to remove an existing structure and build a new single-family home.  Prior to completing the purchase, Popchoi had the property surveyed and the survey showed an encroachment on the property by a fence owned by Edmonson, a neighbor.  Popchoi did not disclose the encroachment to Kiss and went ahead with his purchase from Kiss.  Kiss gave Popchoi a statutory warranty deed.

When Popchoi began construction, the neighbor sued for adverse possession.  Popchoi contacted Kiss and demanded that Kiss defend the claim.  Kiss agreed, on the condition that Kiss have the sole right to control the disposition of the claim.  Kiss intended to concede the neighbor's claim and simply pay damages to Popchoi, because to do so would less expensive than defending the claim.

Popchoi rejected Kiss' offer and proceeded to defend the claim on his own.  Edmonson prevailed on a summary judgment.  Popchoi then asserted a damage claim against Kiss and the trial court ordered Kiss to pay the value of 165 square feet lost to Edmonson and $30,281.90 in attorney fees incurred by Popchoi in the defense of the claim.   The attorney fees award was almost three times the value of the land.  Kiss appealed the attorney fee award, which was affirmed by the Court of Appeals.

The Supreme Court affirmed the award of attorney fees, holding that the statutory warranty deed imposes upon the grantor a duty to undertake a good faith defense of the claim.  The Court held that Kiss breached that duty by conditioning his offer to defend on the ability to immediately concede the claim and pay damages.  Put another way, Kiss had to litigate the claim.

Importantly, the Court rejected the argument that the buyer waived the deed warranties as to the adverse possession claim by closing with knowledge of the adverse possession issue.  Even a buyer with knowledge of a potential claim can rely on the deed warranties.

In summary, the case teaches:
  • That the deed warranties include a warranty that buyer will not have to suffer or defend an adverse possession claim for the six years following closing;
  • That the duty to defend title means just that - the seller must actually defend the claim, or pay the costs of a defense, in addition to compensating for any lost property.
Further, sellers should not rely on the title insurance policy they purchase for the buyer at closing.  Standard title policies do not cover issues of adverse possession that are not a matter of record.  Extended title policies are available with such coverage, but may be prohibitively expensive and need to be reviewed by counsel to assure the coverage is adequate.

Sellers need not live in fear, however.  With the help of effective legal counsel, a seller can identify known risks and expressly disclaim and allocate those risks, either in the deed or in a properly-drafted addendum to a purchase and sale agreement.  This process should be part of nearly all real estate transactions and is well worth it, because it is the only effective way of managing a seller's risk after closing.

- Ryan D. White

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