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“The 2Point Way”—"Did You Notice?" Constructive Notice & Recording Laws

The concept of ‘notice’ relates to several areas of property titles law. When establishing the seniority of conflicting deeds that may have been executed and delivered—but were not properly recorded in public records—notice is often a critical consideration.

Determining if a party has notice of a document, legal issue or situation can be proved or disproved according to several standards. There are three types of notice generally recognized by American courts. Any of the three (defined below) may become relevant when determining senior rights in a dispute grounded in overlapping deeds from a common grantor:

 

Actual Notice: “…a purchaser of real estate is charged with notice of an easement where the existence of the servitude is apparent upon an ordinary inspection of the premises.” Hall v. Allen: 771 S.W.2d 50 (1989) (Missouri). Under this standard, a potential purchaser typically would have actual notice of a visible road, an overhead utility line or buildings existing on a tract of land.

Constructive Notice: “… a legal inference, conclusive in its nature, established, from facts, such as the notice imparted by the record of instruments.” City of Dallas v. Rutledge: 258 S.W. 534 (1924) (Texas). Constructive notice puts a potential purchaser on notice of any fact or document within the existing chain of title for the tract under consideration.

Inquiry Notice: “…Notice of facts and circumstances which would put a man of ordinary prudence and intelligence on inquiry is equivalent to knowledge of all of the facts a reasonably diligent inquiry would disclose.” Schneider v. Henley: 61 Cal. App. 758 (1923). Inquiry notice is more situation-dependent, as it requires a potential purchaser to make further inquiry when presented with a situation or circumstance that would cause a ‘prudent person’ to inquire further. Examples could include visible utility risers that would suggest the existence of underground pipelines or other structures.

 

Recording Statutes and Notice

 

State statutes generally favor those who promptly record deeds and other documents relating to transfer of titles. The obvious corollary: unrecorded documents are frequently given less regard when a conflict arises between two transfers from the same grantor that overlap or otherwise are in conflict.

 

The justifications of recording laws and their limitations both are expressed in the early Pennsylvania decision Levinz v. Will: 1 U.S. 430, 1 Dall. 430 (1789): “The original intent, then, of the makers of the law immediately under consideration, and their principal reason, seems to have been, to prevent honest purchasers or mortgagees of real estates, from being deceived by prior secret conveyances or incumbrances; and therefore, they have directed that such conveyances or incumbrances shall be recorded in six months, or that they should not be sufficient to pass any estate. Thus, by having recourse to the offices of the recorders, any one may ascertain the previous liens upon the property which he wishes to purchase, or to receive as a pledge; and this amounts to a constructive notice to all men, and supersedes the necessity of express personal notice. But the legislature did not mean, nor have they, in fact, enacted, that express personal notice, where given, should have no effect; neither could they entertain an idea of defeating fair and honest bargains, which do not injure other persons and if this unrecorded deed can be obligatory in no other manner, it may certainly operate as a covenant to stand seised to uses.”

 

Types of Recording Laws

 

It is not uncommon for land use professionals to assume that the first recorded document always represents senior title, but this is not the case.

In a few states—such as North Carolina—a “race to the courthouse steps” approach seemingly simplifies the determination of the senior claimant, based purely on the order of recordation. However, only a few states apply this standard.

More common are the “race-notice” jurisdictions where a more recent deed that nevertheless was recorded first is considered senior only for a bona fide purchaser. Bona fide purchaser status is defined as a… “purchaser for value in good faith and without notice of any adverse claim.” First National Bank v. United States: 625 F. Supp. 926 (1986). Based on this standard, if a subsequent purchaser—who recorded his deed first—had any form of notice of the prior unrecorded right, the first unrecorded document would still be considered the senior title.

Another group of states apply a ‘notice’ standard that elevates notice of other claims above priority of recording, as described in the dissenting opinion of the Colorado ruling Page v. Fees-Krey, Inc.: 617 P.2d 1188 (1980): "Because the Colorado recording statute does not explicitly require that the transferee of real property secure priority of record as against a prior transferee, it more closely resembles the prototypical “pure notice” statute than the prototypical “race-notice” statute..." New Mexico is another state that applies the ‘pure notice’ standard.

 

Recording statutes do not shield researchers who fail to perform a diligent search of relevant records, as described in the Kansas ruling Bi-State Development Co. v. Shafer, Kline & Warren, Inc.: 990 P.2d 159 (1999): “Kansas courts charge parties with constructive notice of public records. … Similarly, subsequent purchasers are charged with constructive notice of the presence and contents of recorded interests in land, if sufficiently described, even when they were not a party to the conveyance and when the interest was not properly indexed by the register of deeds.”

 

Another common misconception regarding unrecorded documents is that an unrecorded deed is void—this is not the case. As described in the Pennsylvania example above, courts generally agree that an unrecorded deed is still considered a valid contract between the original parties. Recording statutes only make unrecorded deeds voidable, not void. Recording statutes are distinct from the Statute of Frauds, that requires certain contracts to be in writing.

 

Bank Sold the Same Lot Twice…

 

The Tennessee decision Milledgeville United Methodist Church v. Melton: 388 S.W.3d 280 (2012) describes an unusual ‘race-notice’ dispute. A local bank sold its adjoining parking lot to the church next door in 1974, but the deed was never recorded. The bank continued to pay the taxes on the parking lot but the church built its own parking area on the tract and utilized it for church parking for over 30 years.

In 2008, the bank—apparently forgetting about its prior conveyance—sold the same parcel to Melton, who promptly recorded his deed. Unsurprisingly, the title search made prior to Melton’s purchase did not discover the prior unrecorded deed, and tax records seemed to indicate that the bank still owned the tract up until the time of sale to Melton. On the other hand, Melton was a local resident who had driven by the site for many years. As a result of his familiarity with the area, the court concluded that Melton had inquiry notice of the prior interest by the church, despite lack of a recorded deed.

Under the Race-Notice law of Tennessee, the court concluded that: “When determining priority in a race notice jurisdiction, the subsequent purchaser must establish that he or she was the first to record the deed for the conveyance. In addition, the subsequent purchaser must establish that he or she was a bona fide purchaser of the property …

The purchaser must establish that the property was purchased:

(1) in good faith;

(2) for valuable consideration;

(3) without notice of the outstanding rights of others.

All of these elements must be satisfied before a prior interest is recorded or the purchaser will not be considered a bona fide purchaser.

… this Court has held that record notice is only one of many ways by which a subsequent purchaser may be put on notice of another’s interest in land.”

Melton’s familiarity with the long use by the church proved inquiry notice of a prior claim. Melton also had actual notice of the possession of the parking lot by the church. Therefore, his claim of bona fide purchaser status failed.



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