Real
Estate Finance Notes
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
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
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
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.