Real
Estate Finance Notes
More on the Recording Acts
“First
in time, first in right” is the rule unless you can take advantage of the
Recording Acts. You can do so if the interest
was created by an instrument. If you
have an instrument, it’s capable of being recorded. But if there’s no instrument, there’s nothing
to record, and thus an exception to the Acts.
Take some hypotheticals: O conveys the property to A on the first
day. On the second day, O conveys the property
to B. Who’s the owner of the property? First in time, first in right under the common
law, so A owns the property. You can’t
sell what you don’t own! O doesn’t have
the right to convey the property to B because he’s already sold it to A. He’s committed a tort! He doesn’t have the right to do what he’s done, but he does have that power, to convey a good title to B even
though he didn’t own the property at the time.
The source of that power is the Recording Acts: the whole panoply of
acts that make up the Recording Acts.
These statutes, taken together, are designed to create a public record
of land ownership. We want the public to
be able to rely on these records with some degree of confidence. That’s why we must give O the power to convey
a title that he doesn’t own.
Three types of recording statutes
Notice statute – this requires that B, the
subsequent purchaser, pay value and take without notice. It doesn’t say anything about B recording; it’s
not necessary for B to record. Take the
example of O grants to A, then to B, and B is without notice and pays
value. It turns out, under a notice statute, B is the owner of the property! Does that mean B doesn’t have to record? No. If
O tries to transfer to C without notice then C is the subsequent purchaser and
will prevail over B. The Recording Acts
don’t create a criminal penalty for not reporting, but they create a very strong
incentive to record. Until you record, your title is at risk from
subsequent good-faith purchasers. But
the Recording Acts create no incentive to “unrecord”
or “erase”. There is no provision to
erase. The public record gets longer and
longer. There is no editing process that’s
even permitted. There are certain
procedures that are followed, but that’s all.
The best way to give notice is
to record: everyone who deals with
the property has constructive notice
of what’s recorded about that property as long as it’s recorded properly. So once you record, no one else can take without notice.
Race statute – this is the
simplest. This creates a race to the
courthouse. Whoever gets there first,
wins! These statutes are only used in
Notice-race statute – this one is the most
popular, and it’s a combination of the two above. In states with this statute, the subsequent person
who wants to be protected must give value, take without notice, and record first. There are variations on these, but they’re
not particularly important. Sometimes
there are grace statutes: as long as
you record within 30 days, it will be retroactive to the date of the deed. These were designed for the times when it
took a long time to get to the courthouse.
Many closings actually take place at the courthouse.
So
the incentive is to record as soon as you buy.
How do you do that? You use a title
insurance company and do escrow. The
seller says: don’t deliver the deed until you have the cash. The buyer says: don’t deliver the cash until
you have recorded the deed and checked and made sure that no one got in line
ahead of them. The third party makes
sure that both buyer and seller were honest.
“All
unrecorded conveyances are void as against a subsequent good faith purchaser
for value.” What kind of statute is
this? It’s a notice statute. It doesn’t talk about having to record
anything. Is an unrecorded conveyance
void as against anybody? What about as
to O? What if you add: “…who records
first”? Then it’s a notice-race statute. If you don’t meet all the requirements, you’re
back to the common law and whoever was first in time will prevail. What if you get rid of the “good faith”
part? What kind of statute is it
then? It’s pretty much a race statute. But make sure to read the cases on this statute. There’s a lot of judicial interpretation
involved. Courts generally don’t like pure race statutes. In some states, there may be statutes that appear to be just race, but courts will
find notice implied.
Let’s
say A buys on day 1, B buys on day 2, then A records
on day 3 and B records on day 4. B is a BFP
(bone fide purchaser). If B didn’t have
notice on day 2, it doesn’t matter what happens after that in a notice jurisdiction. Once B records, nobody else can be a BFP. With a race statute, A wins. In a notice state, B wins because he was a
BFP at the time B obtained the deed. In
a “notice-race” state, A wins because he got to the courthouse first.
Interests outside the
Recording Acts
We
have mentioned some of them: short-term leases are not usually recorded. The law says that we protect the tenant
because they’re going to be gone soon anyway.
Adverse possession has no document; it happens by operation of law. There’s no penalty for non-recording and no
requirement for recording. It’s the same
thing with prescriptive and implied easements, dower, and curtesy.
When
you have unfiled mechanics’ liens, you have an owner
and a contractor who is going to build something. The contractor enters into contracts with subcontractors,
laborers and material suppliers. The
problem is that the contractor doesn’t get paid, or gets paid but doesn’t pay
the other folks. If you just go by the
law of contracts, the other folks have no claim. They’re in privity of contract
with the contractor. They can sue the contractor
if they want, but they have no claim against the owner because there’s no contract
between the owner and any of those people.
Unjust enrichment may or may not help.
Therefore, the law creates a lien in favor of the subcontractors and
others.
If
you do work on a property and don’t get paid, you have a lien (like a mortgage)
for whatever amount is owed to you. You
have a certain number of days (usually 60 or 75) in which to file that lien and
record it. Here’s the killer: if you
record within that certain number of days since you last did work, it relates
back in time to the date you first
worked. Therefore, your priority is from
the date the work first commenced. This
means that you can buy property and find out that there are mechanics’ liens
that were filed after you bought the property but the priority relates back to
before when you bought it, and thus your property is subject to the lien.
If
you search the public records diligently and don’t find anything, you may still
take subject to this unrecorded stuff! How
do you protect yourself from interests outside the Recording Acts? Dower is tough, because all you can do is
look at the deed. But unfiled mechanics’ liens, especially if they’re
significant, you can actually come out and look and see if work has been done
in the last 75 days.
Recording defects
You
also can’t rely 100% on things being present
in the public record to say you have good title. Forged and undelivered deeds are void, though
many states have statutes saying that if a deed is recorded, that is conclusive
evidence as to subsequent purchasers that the deed was delivered. If the deed was
not acknowledged or acknowledged ineffectively (like if it was notarized wrong),
then it wasn’t capable of being recorded.
If
you search the public records and find out that John Doe has a power of attorney
for Jane Smith and then you see that John Doe has executed a deed within the
powers granted by the power of attorney, then everything’s okay. But if Jane Smith died or became incompetent between
the issuance of power of attorney and the time of the deed, then the deed is no
good. Even though you see the deed and
even though there is no way you can tell that any
recording defects exist, the deed is void
and transfers nothing to the grantee. These are “off-record” risks. The only way to protect yourself
is with some kind of insurance whether that be a guarantee from an attorney, title
insurance, or otherwise. But the
Recording Acts can’t protect you from this stuff.
To
be a bona fide purchaser for value, you must (1) pay value. This is not designed to protect donees (people who take by gift or inheritance). It’s designed to allow property to be used
freely in commerce. The only exception
is in
Is
a mortgage a purchase? Will banks and
commercial lenders tolerate a situation where they’re not protected by the
Recording Acts? No way! The legislature will protect them! What if O grants to A by an unrecorded deed,
then B lends money to O, and then gets a mortgage from O for no consideration? Is B a purchaser for value? The mortgage wasn’t given in consideration of
any value. It doesn’t have to be much to
support the mortgage. He could give a
little bit of consideration, and that would be enough to make B a
purchaser. The consideration doesn’t
have to be fair or anything, it just has to be valuable. What if it’s the same situation except O
gives B a deed to satisfy the debt? Is B
a purchaser for value? Then there’s
plenty of consideration. B had a right
to money and gave it up, and O had a right to property and gave it up. We’ll look at this again when we study deeds
in lieu of foreclosure.