Real Estate Finance Notes 9/10/04


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 Louisiana and one of the Carolinas.  There is a Louisiana case that says that it doesn’t even matter if you were B and you knew of the sale to A.  If B runs down to the courthouse and records first, he wins, and there’s nothing wrong with B treating the O to A transfer as void.  This seems very harsh!


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.


Ohio has a notice-race statute mostly, but when you talk about mortgages, Ohio has a pure race statute.  Whoever records their mortgage first has the priority.  Mortgagees like this a lot!  Fraud is actually very rare!  Usually problems arise under the Recording Acts because people were neglectful rather than fraudulent.


“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 Colorado.  You must (2) take without notice.  (3) There must be a recordable instrument.  So if O grants property to A and it goes unrecorded, then O gives the property to B as a gift, then B isn’t a bona fide purchaser.  Then B records.  If B isn’t a purchaser, then it doesn’t matter what statute we have: B is a donee, so the Recording Acts don’t apply to B, and thus the common law applies.  A wins by “first in time, first in right”.  What if O gives to A as a gift, then sells to B but the deed isn’t recorded, then A records and then B records.  So A wasn’t a BFP, but B is.  Who wins?  B wins because B didn’t have notice of the A transaction when he bought.  If you rely on the common law, gifts are actually the best way to get property!  There’s nothing wrong with the gift, and A will be protected by the common law, but A better record, because as long as it’s unrecorded you’re at risk of losing out to a subsequent purchaser for value.


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.


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