A recent case from the Corpus Christi Court of Appeals, Chapa v. Arrellano, caught my attention and offers the chance to talk through some important reminders for anyone purchasing land.

Image by Zach Schorr from Pixabay

Background

In August 2017, Chapa purchased a piece of land from the Arrellanos in Hidalgo County, Texas.  She intended to build a home on the property.  Prior to purchase, she conducted a visual inspection of the land and saw no visible impediment for the construction of a home on the property.  She did not hire a title company or an attorney to assist with the purchase of the property.

The parties signed a document labeled a “General Warranty Deed,” which was prepared by a lawyer Chapa selected.  Three relevant portions of the deed were as follows:

Under the section titled “Exceptions to Conveyance and Warranty,” the deed stated there was a “Right of Way easement in favor of Rio Grande Valley Gas Co, as shown by an instrument dated September 12, 1961, in Volume 1028, Page 12, Deed Records of Hidalgo County.”

The deed also stated this was an “‘as is, where is’ transaction and reflects the agreement of the parties that there are no representations of express or implied warranties. [Chapa] has not relied on any information other than [her] inspection.”

The deed also contained a clause as follows: “No title examination was required in connection with the above preparation of the document concerning the above described property, nor was any made.  The preparer expresses no opinion as to title of this property, nor as to any taxes due on the property.”

After purchasing the property for $32,000, Ms. Chapa began construction plans.  Sometime after that, there was a sign on the property from Rio Grande Valley Gas Company indicating that an easement existed and informing her that a gas line ran across the property. Later, she was notified by the gas company she could not build a home on the property due to the easement.

Litigation

Chapa filed suit against the Arrellanos for breach of contract, recession, and actionable fraud.

Both parties moved for summary judgment.  Chapa argued that the sale was fraudulent because the property was not subject for any surface development and was, therefore, worthless to Chapa.  The Arrellanos argued that Chapa had disclaimed any reliance or oral representations by signing the deed, the easement of the gas company was properly disclosed in the deed, and the deed was drafted by a lawyer chosen by Chapa.  Further, Mrs. Arrellano stated that although she knew there was an easement for the gas company on the property, which was disclosed in the deed, she had no knowledge that the property was not suitable for residential use due to such easement.

The trial court granted the Arrellanos’ motion for summary judgment and dismissed the case.  Ms. Chapa appealed the dismissal of her fraud and rescission claims.

Court of Appeals Opinion

The Corpus Christi Court of Appeals ruled in favor of the Arrellanos, affirming the trial court decision.  [Read full opinion here.]

Fraud Claim

In order to prevail on a statutory claim of fraud in a real estate transaction, Chapa has to prove: (1) there was a transaction involving real estate; (2) during the transaction, the defendant made a false representation of fact, false promise, or benefitted by not disclosing that a third party’s promise or representation was false; (3) the false representation or promise was made with the intent of inducing the plaintiff to enter into the contract; (4) the plaintiff relied on the false promise or representation by entering into the contract; and (5) the reliance caused the plaintiff’s injury.

Here, the terms of the deed itself state that Chapa did not rely upon any representations or express or implied warranties from the Arrellanos.  That clause, alone, defeats a fraud claim. She purchased the property “as is”, which indicates it was her failure to properly inspect or investigate the property that caused her injury. Simply put, an “as is” buyer takes the entire risk as to the quality of the property purchased. Further, the deed made Chapa aware of the existence of the gas company’s easement on the land.  Based on these reasons, the Court of Appeals affirmed the dismissal of the fraud claim.

Rescission

The court noted that Chapa’s one sentence argument that was entitled to equitable relief was inadequate briefing and, therefore, the claim on appeal was waived.  Regardless, the court noted that the equitable remedy of rescission is available only when there has been some injury by violations such as breach of contract or fraud.  As noted above, Chapa was aware of the easement, she purchased the property “as is.”  Thus, she simply had no claim to form the basis of recovery.

Key Takeaway Points

This case offers the opportunity to talk through some important considerations when purchasing property.  For more information on this topic, be sure to check out a podcast episode I recorded with real estate attorney & title company owner, David Waggoner, for the Ag Law in the Field Podcast.

First, when purchasing property, it is critical to read any contract, deed document, title commitment, and any other document thoroughly and ensure you understand the contents.  Here, there are several examples of the importance of this.  First, the deed expressly listed the existence of the gas company easement.  Parties should always look for any sort of encumbrances on property in a contract, deed, or title commitment. Second, the use of two words in this deed–“as is”–significantly impacted the arguments that Chapa was able to make against the sellers.  She claims not to have understood the legal implications of the term “as is.”  Further, although the deed was labeled as a “General Warranty Deed,” it expressly disclaimed any warranties, including warranty of title.  This actually makes this deed look like a quitclaim deed, due to the lack of any warranty of title.  Lastly, with regard to deeds, keep in mind that even a General Warranty Deed does not guarantee the use of land for a particular purpose like building a house, it merely guarantees that title is good to the property.

Second, anytime a person is purchasing property, he or she should do an investigation of any easements or encumbrances on the land.  Here, when Ms. Chapa saw the easement listed in the deed, she should have investigated further by looking at the actual terms of the easement, which she could have obtained from the deed records.  If there are any encumbrances listed in documents, found in deed records, or mentioned by a party to the transaction, it is extremely important to investigate the details of such encumbrances.

Third, on that note, oftentimes when property is transferred, there will be a sales contract  signed initially and then a deed that will be executed.  It is critical to ensure the terms in each of these two documents match, because if the contract and deed terms are different, the deed terms will govern.  For example, there could be a situation where parties agreed in the sales contract that all minerals would transfer to the purchaser, but the deed included a mineral reservation by the seller.  Keep in mind that only the seller signs a deed, so this may be easy for a purchaser to overlook.

Fourth, when entering into any type of contract (such as buying/selling land, buying/selling products, a pipeline easement), never rely on oral representations made by the other party.  In all transactions dealing with the transfer of real property, Texas law requires that any promises involved in the transaction must be included in writing in the document.  Here, it does not appear that false statements were made by the sellers, but oftentimes that can be an issue if promises are not included in the document itself.

Fifth, consider title insurance when purchasing property.  Here, title insurance would likely not have helped Ms. Chapa because there was no problem with her holding legal title to the property, but in many instances title insurance can be an important way to manage risk when purchasing land.  Further, in obtaining a title commitment for title insurance, this would give someone another opportunity to view a list of any exceptions or encumbrances, such as easements, that were investigated and listed out by the title company.

Sixth, I also think it is wise to hire an attorney to assist with drafting a sales contract and deed, and to look over the title commitment for anything unusual.  In this case, Ms. Chapa did select an attorney to draft the deed, but it is unclear if she hired the attorney to assist and advise her with regard to the purchase, or if she just selected an attorney who the sellers then hired, on their behalf, to draft a deed.  Keep in mind that an attorney cannot represent two parties to the same contract, so it is important to have someone representing your own interest.  Also remember that paying for an attorney to review real estate documents up front will be far cheaper than hiring an attorney to represent you in a lawsuit like the Chapa case down the road.