Real Estate Finance Notes 9/15/04

 

What does it mean to be a bona fine purchaser such that you’re a subsequent purchaser for the purpose of the Recording Acts?  A purchaser buys something.  But mortgagees can also be purchasers.  We also want to know whether you parted with consideration or whether the consideration was preexisting.

 

Notice

 

How can B get notice of A’s rights?  There are four ways: (1) actual knowledge, (2) recorded documents, (3) persons in possession, or (4) the duty to inquire from any of the above.  The principal basis for the Recording Acts is constructive or actual notice from recorded documents.  If you look in the record, you’ll see things and have notice that way.  But even if you don’t look in the record, you’re still deemed to know what you would have known if you had looked.  In order to get notice from the person in possession, it must be somebody other than you’d expect.  So what’s really the difference between a race jurisdiction versus a race-notice or notice jurisdiction?  If you’re in a race state, you only have to look at the public record.  If an earlier deed is not of record, you know that you’ll win.  In a race-notice jurisdiction, you must look not just at the public record, but also the property itself.  If notice is required, then if there is someone in possession inconsistent with the record title, you’ll be deemed to know that for the purposes of determining whether you’re a bona fine purchaser.

 

You may not know everything, but you may know something.  There may be a recorded document that you actually see, but it’s defective.  Or you might see someone on the property who isn’t the person selling it to you.  A defectively recorded document still gives you notice of something: someone is claiming an interest in the property.  Once you see that, you’re required to make a reasonable investigation, and you’re charged with notice of anything that a such an investigation would reveal.  Thus, you might not have complete notice, but you may have enough notice to require you to dig deeper.  Only certain documents can be recorded, as specified by the statutes, but the recorder will accept virtually anything.  Frequently, when there is a dispute concerning title, an affidavit will be recorded saying a certain person claims interest in the property.  That doesn’t charge you with notice because it’s outside the statute, but it creates the duty to investigate the claim in the affidavit to see if they’re valid or not.

 

Let’s say a neighbor informs a potential buyer about an unrecorded deed.  Then you have actual notice.  Let’s say O gives A an unrecorded easement, then O takes out a mortgage with X, and the mortgage mentions the easement.  The mortgage is recorded.  The easement itself isn’t recorded, but a purchaser, if they search the record, will be charged with at least inquiry notice of the easement.  Of course, what constitutes a reasonable inquiry is a question of fact.  But if you don’t see the mortgage, then you’re not charged with inquiry notice and you’ll take free of the easement.

 

One of the most common forms of notice is when you have someone in possession whose possession is inconsistent with the record ownership.  For example, there’s a transfer from O to A that’s unrecorded.  O goes to sell the house to B, but A is in possession.  B is charged with notice that something is wrong in a race-notice or notice jurisdiction.  This happens all the time.  What happens if it turns out that A is really O’s son?  Is that possession inconsistent with the public record?  Maybe A has a short term lease.  You’re on notice that there is a lease if you say that there is a tenant, and you are also on notice of anything that a reasonable inquiry would reveal about the lease.  That means you probably have to talk to all the tenants or look at all their leases.  When people buy commercial buildings that are rented, they must get information on all the tenants and what’s called an “estoppel letter” from each tenant saying that they are only a tenant.

 

How the Recording Acts work

 

Lawyers don’t do a lot of the title search, but they do a lot of litigation with title insurance companies.  Title insurance companies typically do the title search.  Lawyers, when litigating or negotiating must understand how the system works.  The way we do it is probably the worst possible way.  The system is improving, but it’s happening slowly.  In Franklin County, starting in 1980, all of the title records are on microfiche.  At some date after that, the records were computerized.

 

Nobody is going backwards and trying to put all of the title records on computer for two reasons: (1) It’s time consuming and difficult with a tremendous potential for error.  The possibility for transposing numbers or misspelling somebody’s name is great.  You might make things worse!  (2) Gradually, as a result of the statute of limitations and other curative legislation, old titles become irrelevant.  Lawyers and title companies don’t search back to the founding of the United States or to when Ohio became a state.  They go back 40-60 years plus the statute of limitations for adverse possession.  So after a certain period of time, you won’t have to look at the old records at all.  The old records are “truly disgusting”!  They’re nasty!  They’re kept in large books (both indices and records themselves).  Without an index, it would be utter chaos.  The indices are kept in huge books.  Everything in them is handwritten.  They take up a whole floor in the county building on Fulton and High.

 

The best way to do this sort of a fully computerized system would have been to have a tract index.  The tract index is simple.  Assuming you can identify the tract, which is not hard in the western United States, you give the tract a number.  Then you write down every transaction that occurs involving that land.  You don’t have to worry about “wild deeds”, because it’s all right there!  But there are two problems with the tract index: (1) It’s expensive to administer because you must make sure that each document is being recorded under the right tract.  There must be someone in the office who can double check these things, especially considering that one big tract in 1900 could be 1,000 little tracts in 2000.  Keeping track of the tracts is not an easy process.  In the western United States, we divided up the land into squares (township) with the Northwest Ordinance.  The entire western United States has been surveyed this way.  The problem is that if you have a survey based on metes and bounds, it becomes impossible to have a tract index.  We started out not being able to use a tract index even though many western states could have done so early on.  There may be a simultaneous tract index maintained in some states, but it is not the official index.

 

The grantee-grantor index is difficult to use, but easy to maintain.  You make a copy of the record that’s filed, and then fill the index.  The clerk doesn’t need a lot of special training and shouldn’t have to exercise any discretion.  In the index, you have the type of instrument, the grantee’s name, the grantor’s name, information on where you can find the document, and what tract of land the document relates to.  The grantee index is same thing, except for how they’re alphabetized.  The grantor’s index is alphabetized under the grantor’s name; the grantee’s index is alphabetized under the grantee’s name.

 

How to do a title search

 

The whole premise of the system is that you can’t own the property unless you were the government or unless you were previously a grantee.  Somebody must have conveyed the land to you.  Your goal is to establish a chain of title.  You want to say, starting today in 2004, we have a method of search to determine everyone who has been an owner or owned an interest in a certain property from some date forward.  You want to find that whoever you’re interested in now (for example, the buyer is interested in the seller) is the current owner.  So you work backwards.  You only know who the current owner is.  When we looked at the general warranty deed, it included a blank for the book and page of the prior instrument.  That can aid your title search.

 

So you start in the grantee index, starting today, and you look backwards in time.  At some point, you should find that O, the person you’re getting ready to buy from, was a grantee.  You get the deed itself and make sure it’s valid.  Then you’re done with looking under O’s name in the grantee index.  If it’s B that was O’s grantor (you find a transfer from B to O), then you must ask: how did B become the owner of the property?  At some previous date, B must have been a grantee.  So you look in the grantee index under B’s name.  You keep looking and find that B was a grantee and A had previously conveyed the property to B.  So you start looking under A’s name.  You keep looking back until you find a patent (a deed from the government) or you just look back the customary time period in the jurisdiction where you’re working.  You’ll find that the grantor was previously a grantee, and then whoever conveyed the property to that earlier grantor was herself a grantee, and so on.

 

So we’ve established a chain of title!  But that doesn’t give you the whole picture!  The next problem is that under the Recording Acts, O only has good title if O and everyone in the chain of title was a bona fine purchaser.  So if we’re in a race-notice jurisdiction, we must look at B and make sure that B’s deed was recorded prior to any other deed from A.  We must make sure that no one in this chain of title sold the property to someone outside of the chain of title prior to selling it to the next person in the chain of title.  We have to make sure A didn’t sell to X before A sold it to B.  So the next step is to start with A, look in the grantor’s index, and search until we find the recorded deed to B.  If we find a deed to X before the deed to B, then we have big problems!  That would mean that B, at least in a race-notice or race jurisdiction, is a “loser” and didn’t get good title!  In a notice jurisdiction, it will be a little more complicated.  But if we assume that the deed from A to X was recorded before the deed to A and B, then B loses everywhere.

 

Once you find the deed from A to B and you find nothing intervening (from the date A acquired the property until A transferred to B), you stop searching under A’s name and start searching under B’s name.  You’re no longer concerned with any transfers from A because at this point we’ve discovered that B was first to record and thus has “won”.  So you start searching under B’s name and search until you find a transfer from B to O.  You shouldn’t find anything intervening.  That would mean that O acquired good title.  Then you search under O’s name from the time O acquired title until the present, which would mean that O is the owner of an unencumbered fee simple absolute.  It’s not going to be this simple or clean in practice, though.

 

“Wild” deed problems

 

There are a lot of possibilities of transfers that you won’t find using the standard technique that we’ve just discussed.  What if the deed isn’t indexed at all?  What if you have a deed from O to A that is recorded, but not indexed, then you have a deed from O to B.  B has two choices: B can look through every deed, or look at the index.  There’s no way you would do it without the index.  But in this situation, searching the index won’t help B because the recorder’s office made a mistake.  Who wins?  Some states would say that B loses, but Braunstein thinks that’s dumb.  The mere recordation of the instrument doesn’t do you any good unless you have a way to find it.  You can’t say B has notice of something that’s impossible to find!  What do you do if you’re a careful attorney?  A has a potential problem: there’s a transfer from O to A, A has recorded.  So if you’re A you better check the records to make sure that the deed was both recorded and indexed.  This is a cheap process that A should undertake.  That’s why A should lose if he doesn’t do this.  In some states, the index isn’t considered part of the public record at all, and B loses, and Braunstein thinks that’s dumb.  That’s the wildest deed, because there’s no way to find it at all.

 

A transfer from A to B and then from B to Y who doesn’t record and then to Z who does record.  Then B transfers to C, who doesn’t have any actual notice of the unrecorded deed from B to Y.  The problem is that there is a deed in the record.  There’s a recording of the transfer from Y to Z, but C has no reason to look in the index under “Y”.  When C is getting ready to purchase from B, he looks in the grantee index and finds that B was a grantee from A.  He also finds that A was a grantor to B.  There was no transfer between when A acquired it and when it was sold to B.  There’s no transfer from B on the books.  Therefore, it appears that the title is clean.  How do you decide that C ought to win over Z?  You could argue that both of them are innocent parties.  But it looks like Z didn’t do a proper title search.  What should Z have done?  Z should have had Y record the deed.  Then Z would have good title and C would have notice in the record.

 

The statute says that the only people who can take advantage of the Recording Acts are people who took without notice and whose deed was the first recorded.  But Z’s deed was the first recorded!  C has no practical way to find out about the transfer from B to Y and then Y to Z.  Z can find out there’s a problem and solve it rather cheaply.  It would be very expensive for C to solve the problem.  The policy is that we ought to put the loss on the least cost avoider, which is what will tend to make the Recording Acts effective.  C can’t say that his deed was first recorded.  But we deem Z’s deed as unrecorded.  What we do is that we read into the statute (sometimes because it’s there and sometimes because courts imply it) that deeds must be “duly” or “properly” recorded.  We say that Z knew that there was a break in the chain of title and that Z should have done something to fix it.  Therefore, C, who took without notice and recorded before Z straightened the situation up, prevails.  If we had a tract index, then C would have notice!  C would see everything except the transfer from B to Y.  This particular wild deed problem would be solved by the tract index.

 

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