Chapter 12
THE RECORDING SYSTEM AND TITLE ASSURANCE
A. General function of: The main function of recording acts, which are in force in every jurisdiction, is to give a purchaser of land a way to check whether there has been an earlier transaction in the property inconsistent with his own. Even if there has been an earlier transaction, if it is not recorded the later purchaser will generally gain priority — thus the recording acts give a buyer a way to be sure that he is getting good title.
1. Relations between original parties: Recording acts only govern the relationship between a grantee and a subsequent purchaser of the same property. They do not govern the relation between the grantor and the grantee under a particular conveyance.
Example: D conveys Blackacre to P. D then conveys it again to X, who doesn’t know about the D-P conveyance. X records his deed before P can record his. Because of the recording act, X’s deed takes priority over P’s. P sues D for his double-dealing. P will be able to recover against D, because the recording act has no effect upon the relations between both parties to a particular deed (i.e., P and D), only the relationship between two grantees under different deeds (i.e., P and X).
B. Different types of acts: There are three basic types of recording acts: (1) "pure race" statutes; (2) "pure notice" statutes; and (3) "race-notice" statutes.
1. Pure race statutes: A race statute places a premium on the race to the recorder’s office. The subsequent purchaser must record before the earlier purchaser, but he is protected regardless of whether he has notice of the earlier conveyance. Very few pure race statutes remain on the books.
2. Pure notice statute: A pure notice statute provides that an unrecorded instrument is invalid against any subsequent purchaser without notice, regardless of whether the subsequent purchaser records prior to the first purchaser.
3. Race-notice statute: A race-notice statute protects the subsequent purchaser only if he meets two requirements: (1) he records before the earlier purchaser records; and (2) he takes without notice of the earlier conveyance.
Illustration: In 1985, O conveys Blackacre to A. In 1986, O conveys to B. In 1987, B records. In 1988, A records. Here is how the rights of A and B to Blackacre would be resolved under various types of recording acts:
Race: Under a pure race statute, B wins automatically, without regard to whether he had actual notice of the earlier conveyance to A — B recorded his deed before A did, so that is the end of the matter. (Had A recorded in 1987 and B in 1988, A would have won, even though at the time B took, he had no way to find out about the earlier conveyance to A.)
Notice: Under a pure notice statute, B wins. In fact, B would have won even if he never recorded at all, or recorded after A — the mere fact that B took after A, and without notice of A’s interest, would be enough to give him the victory.
Race-notice: Under a race-notice statute, B will win only if he took without actual notice of A’s interest. Furthermore, if B had recorded after A (instead of before A, as really happened), B would have lost due to his late recording even if he took without actual notice of A’s interest. So under the race-notice statute (probably the most common kind of statute), the subsequent purchaser (here, B) has two obstacles to overcome: (1) he must record first; and (2) he must take without actual notice of the earlier interest.
C. Mechanics: Here is a summary of the mechanics of recording:
1. Deposit: The grantee (or the grantee’s title insurance company) brings the deed to the recording office (usually located in the county where the land lies). The recorder stamps the date and time of deposit, and then places a photocopy of the deed in a chronological book containing all recorded deeds.
2. Indexing: Then, the deeds are indexed. Usually there is both a grantor index (enabling a searcher to find all conveyances made by a particular grantor) and a grantee index (permitting the searcher to find all conveyances made to a particular grantee).
D. What instruments must be recorded: Recording acts generally allow (and in effect require) the recording of every instrument by which an interest in land, whether legal or equitable, is created or modified. Thus not only fee simple conveyances, but also life estates, mortgages, restrictive covenants, and tax liens, are all required to be recorded.
1. Not recordable: Some types of interests are usually not recordable: a. Adverse possession:
b. Some easements: Similarly, an easement by implication or necessity usually does not have to be recorded (since it does not give rise to a recordable document). (But in some instances, a conveyance of the property to a bona fide purchaser who takes without notice of the easement may cut the easement off.) On the other hand, an express easement is recordable.
c. Short leases: In many states, a short term lease (e.g., less than three years) may not be recorded. If so, that lease will be valid against a subsequent bona fide purchaser.
d. Contracts: Similarly, some states do not allow executory contracts of sale to be recorded. (But the vendee’s rights will be subordinate to that of a subsequent claimant who actually buys the property.)
E. Parties protected: The subsequent grantee, to get the protection of the recording act against a prior grantee, must either be: (1) a "purchaser for value" or (2) a creditor meeting certain standards.
1. Purchaser for value: In most states, a grantee gets the benefit of the recording act (i.e., he takes priority over an earlier unrecorded conveyance) only if he gives value for his interest.
a. Donee: Thus a donee is usually not protected by the recording act. (Example: O conveys to A. O then purports to give the property, for no consideration, to B. B records, A never does. Under most statutes, B still loses to A, because B — although he is a subsequent grantee who recorded first — did not give valuable consideration.)
b. Less than market value: Although consideration is required, it does not have to be an amount equal to the market value of the property (but it must be more than nominal consideration). (Example: On the facts of the above example, if B had paid half the market value of the property, he would probably have prevailed against A; but if he only paid $1, he would not.)
c. Purchase from or through grantee: One who purchases for valuable consideration from the record owner is of course protected. But also, one who buys from the heirs or devisees of the record owner will also be protected. (Example: O conveys to A. O then conveys to B for value. B records, A does not. B then bequeaths the property to C. C conveys to D. D will prevail against A — even though B in one sense took "nothing," his right to prevail under the recording act against a prior unrecorded deed is itself devisable.)
2. Creditors: A landowner’s creditors may also receive the protection of the recording act.
a. Mortgage: If a creditor receives a mortgage from the landowner, he is treated as a "purchaser," and he must generally meet the consideration requirement. This means that if he is giving something of new value (e.g., cancelling part of the debt in return for the mortgage, or extending the owner’s time to pay), he will probably be deemed to have given consideration, and will thus be protected against a prior unrecorded conveyance. But if he merely retains the same rights he always had (to be paid the full amount of his debt, at the time promised), then he is not giving new value, and his mortgage will not be protected against a prior unrecorded conveyance.
b. Judgment and execution creditors: A creditor who obtains a judgment, or who is allowed to attach his debtor’s property at the beginning of the lawsuit, gets a lien against the debtor’s property. This lien may or may not be protected under the recording act against a prior unrecorded purchase, depending on how the statute is drafted. (If the statute only protects "purchasers," the lien creditor probably does not get protection against the prior unrecorded deed.)
3. Eligible to be recorded: The subsequent purchaser who wants the protection of the recording act must record his own deed, and that deed must be one which is in fact eligible to be recorded. If it is not, the purchaser will not be protected even if the recording clerk makes a mistake and accepts the document.
a. Must record whole chain: Also, the subsequent grantee must see to it that his entire chain of title is recorded. (Thus if one of the subsequent grantee’s predecessors in interest submitted, say, an improperly-notarized document that was therefore not eligible for recording, the subsequent grantee would lose.)
F. Notice to subsequent claimants: In virtually all jurisdictions (that is, jurisdictions having notice or race-notice statutes, but not those very few having pure race statutes) the subsequent purchaser will lose if he was on notice of the earlier deed. A purchaser can be on notice in three ways: (1) actual notice; (2) record notice; and (3) "inquiry" notice.
1. Actual notice: If the subsequent purchaser is shown to have had actual notice of the existence of the prior unrecorded interest, he will not gain the protection of the recording act in a notice or notice-race jurisdiction.
2. Record notice: The subsequent grantee is deemed to have "record" notice if the prior interest is adequately recorded. However, the mere fact that a deed is recorded somewhere in the public records does not mean that the recording is "adequate" — the document must be recorded in a way that a reasonable searcher would find it.
a. Defective document: A document which is not entitled to be recorded will not give record notice, even if it is mistakenly accepted for recording. (Example: If the jurisdiction requires the deed to be notarized, and it is not, it will not give record notice. However, states often treat certain formal defects in deeds as being "cured" after the passage of a certain amount of time.)
b. Imputed knowledge: If proper recording of the earlier document took place, subsequent purchasers are on "record notice" even if they never actually see the document that has been filed. That is, the court imputes to the subsequent purchaser the knowledge which he would have obtained had he conducted a diligent title search.
c. "Chain of title": Therefore, the recording of an instrument gives record notice to a subsequent searcher only if that searcher would have found the document using generally-accepted searching principles (use of the grantor and grantee indexes). A recorded instrument which would not be found by these principles is said to be outside the searcher’s "chain of title," and prevents the giving of record notice.
Example: O conveys to A; A never records. A then conveys to B; B records. O conveys the same property to C; C records. Assume that C has no knowledge of the O-to-A or A-to-B conveyances. C will have priority over B, even though B’s interest is recorded. This is because C, when searching title, has no way to know of the A-to-B deed — C would never find the original O-to-A conveyance, and thus cannot know to look under A’s name in the grantor index to discover whether he ever conveyed to anyone else. (Nor would C have any way to know to look for B’s name in the grantee index.) The A-to-B deed is said to be "outside C’s chain of title"; C is therefore not on record notice of the A-to-B deed, and will take priority over B.
3. Inquiry notice: Even if a purchaser has neither record notice nor actual notice of a prior unrecorded conveyance, he may be found to have been on "inquiry" notice of it. Inquiry notice exists where a purchaser is in possession of facts which would lead a reasonable person in his position to make an investigation, which would in turn advise him of the existence of the prior unrecorded right. Such a person is on inquiry notice even if he does not in fact make the investigation. (But the purchaser is responsible only for those facts which the investigation would have disclosed.)
a. Possession: Thus if the parcel is possessed by a person who is not the record owner, this will place a subsequent purchaser on inquiry notice. That is, the purchaser must: (1) view the property, to see whether it is in the possession of someone other than the record owner; and (2) if there is such a possessor, he must inquire as to the source of the possessor’s rights in the property. (Example: Same facts as above example. C had a duty to inspect the property — if inspection would have disclosed that B (or someone claiming under B) was in possession of the property, C would be held to be on "inquiry notice" of B’s interest. Since C could then have learned B’s name, he could have checked back in the records to find the A-to-B deed, and perhaps might have discovered the O-to-A unrecorded deed. If a judge decided that this investigation would have enabled C to trace B’s interest all the way back to O, C would lose in a contest with B because of the inquiry notice principle.)
4. Timing of notice: In order for a subsequent purchaser to be protected by the recording act, she must have made substantial payments before being on notice of the prior conveyance.
a. Installment contract: Where the subsequent purchaser is buying under an installment contract, if she receives record notice (but not actual notice), she is protected as to payments she makes. (Example: O conveys to A, who does not record. O conveys to B under an installment contract. After B has started making payments, A records. B doesn’t learn of the recording, and keeps making payments. Most courts hold that B is protected as a b.f.p. as to payments made before and after A’s recording, as long as the payments are made before B received actual notice of the prior conveyance to A.)
5. Purchaser from one without notice: If a purchaser who takes without notice of a prior unrecorded instrument resells the property, the new purchaser is treated as one who may claim the benefit of the recording act, even if he buys with actual notice. This is done to protect the earlier (innocent) purchaser’s market for the property.
II. TITLE REGISTRATION (THE TORRENS SYSTEM)
A. How the system works: In some parts of the U.S., the "title registration" system or "Torrens" system is available as an option. This system enables the owner of a parcel to obtain a certificate of title, similar to an automobile certificate of title. When the holder of the certificate wishes to sell, his prospective purchaser merely has to inspect the certificate itself (on which nearly all encumbrances must be noted) — a lengthy title examination is unnecessary.
1. How it works: The registration process begins with an application by a person claiming ownership of a parcel to have it registered. Notice is given to anyone shown on the ordinary land records as having an interest in the property. Then, a court hears any claims regarding the property, and if satisfied that the applicant indeed has good title, orders a certificate of title to be issued.
B. Where used: The Torrens system is never required, but is available as an option in 11 states. In only a few areas does the system account for a significant portion of the land area (e.g., Hawaii, Boston, parts of Minnesota and parts of Ohio.)
III. TITLE ASSURANCE
A. Examination by lawyer: One way the purchaser sometimes assures himself that he is getting valid title is to have a title examination performed by his lawyer. Usually, the lawyer does not directly search the records; instead, he orders an "abstract" of title from an abstract company and reviews that abstract. The lawyer then gives his client a written opinion as to the state of the title. The lawyer is liable for his own negligence in rendering an opinion on the title as presented in the abstract (but not liable for any mistake in the abstract itself — here, the abstract company might be liable).
B. Title insurance: The leading means by which a buyer of property can assure himself of a good title is title insurance.
1. Covers matters not shown in title search: Title insurance will protect the buyer against many risks that would not be disclosed even by the most careful title search. For instance, the buyer would be covered if title turns out to be bad because of forgery of an instrument in the chain, fraudulent misrepresentation of marital status by a grantor (so that the spouse’s inchoate right of dower persevered), defects in a prior grant due to lack of delivery, etc. Also, the policy usually covers the insured’s litigation costs in defending his title even if the defense is successful.
2. Scope: But title policies usually contain a number of exceptions, including the following:
a. Facts which survey would show: Policies usually exclude facts which an accurate survey of the property would disclose. Thus encroachments (either by the insured onto adjacent property or vice versa) and violations of set-back rules are generally not covered.
b. Adverse possession: Also, the title policy does not protect against a claim of adverse possession, at least if the physical possession exists at the time the policy is written. Therefore, the buyer must still inspect the property.