Failing to record deed undermines property rights

“Is my 18-year-old, unrecorded deed any good?”That was the question asked in a letter I received recently. The reader saidshe was given the deed to some farmland years ago by a relative on thecondition the deed be recorded only after the relative died.

But before the relative died a few years later, the lettersaid, that relative sold the farm to a buyer who paid a down payment, and therelative carried back a 25-year mortgage for the buyer.

Purchase Bob Bruss reports online.

Of course, I advised the reader to consult a local realestate attorney. But the general rule is an unrecorded gift deed will beinvalidated by a later sale of the same property to a “bona fidepurchaser” for value without notice of the prior gift deed. Also, in moststates a deed conditionally delivered is not effective.

ALWAYS RECORD DEEDS TO ESTABLISH PRIORITY. In theevent of conflicting claims to a property, the first grantee to record his/herdeed usually wins the race to the courthouse. However, there are exceptions,such as when the recorded deed was a gift and the prior unrecorded deed waspaid for with consideration and/or the grantee with an unrecorded deed occupiedthe property, thus giving constructive notice.

As shown by that unrecorded, 18-year-old gift deed above, anunrecorded deed delivered conditionally such as “record this after Idie” is usually invalid as a substitute for a written will or a revocableliving trust.

Especially troublesome are so-called “silentseconds,” which were unrecorded at the time of a property sale. Thesesecond mortgages, usually carried back by the property seller to help the buyerfinance his/her purchase, are not immediately recorded, often to make the firstmortgage lender think the buyer has lots of equity. However, if the secondmortgage lender fails to later record its “silent second,” anotherlien might gain priority, such as a home equity loan obtained by the buyer.

THE PURPOSE OF RECORDING LAWS. Eachstate has recording laws for real estate documents such as deeds, mortgages,deeds of trust, mechanics’ liens, judgment liens, income tax liens, leases andother recordable papers that can affect a property title.

In a few states, an unrecorded deed is invalid unless it isrecorded. But in most states, an unrecorded deed is valid only between thegrantor and the grantee. When a deed is unrecorded, it does not give”constructive notice” to the world of its contents.

The entire title insurance industry depends on interpretingboth state recording laws and their application to a specific documentaffecting a particular property. When an unrecorded document is presented by aclaimant, that person usually loses to someone who previously recorded his/herconflicting document involving the same property.

“First in time is first in right” is the basicrule. But there are exceptions.

For example, suppose I pay you cash for your vacant land andyou give me a properly notarized deed in recordable form. However, being acheapskate, I neglect to obtain an owner’s title insurance policy and I forgetit take my deed to the local recorder of deeds office. A year later, youdiscover I have neither occupied the land nor recorded the deed.

Being in desperate need of cash, you fraudulently sell thesame land to another buyer who pays cash but promptly records his deed.Although I was first in time, the second bona fide buyer had no constructivenotice of my prior deed so he wins the race to the courthouse to record hisdeed, and he becomes the legitimate owner.

Of course, I can sue you for fraud if I can find you and ifyou have any assets.

VERBAL REAL ESTATE PROMISES ARE USUALLY WORTHLESS.”When I die, you will receive all my assets.” Many property ownershave spoken those worthless words, often to their caregiver, lover, friend,relative or spouse.

The reason those words are worthless is the Statute ofFrauds requires real estate transfers to be in writing to be valid. But puttingsuch a promised transfer into a written will or a revocable living trust mightalso be worthless because wills and living trusts can be easily changed beforethe owner dies.

Until a promised title transfer is completed and the deed isrecorded, the grantor can convey the same property to someone else who recordsfirst. Although there are a few court decisions upholding verbal promises basedon detrimental reliance, such as taking care of an ill person, they areexceptions rather than the general rule.

THE BEST WAY TO BE SURE YOU OWN MARKETABLE TITLE. Nomatter what type of written real estate deed you receive and promptly record,the most complete assurance of receiving marketable title is to insist onobtaining an owner’s title insurance policy.

Title insurers carefully research a title before insuringit. Even when a title insurer makes a mistake that isn’t discovered until manyyears later, the title insurer must then pay the insured property owner either(1) the diminished value of the property if the title insurer failed todisclose a recorded document, such as an underground easement through thebackyard, (2) cost of correcting the error, such as moving an undergroundeasement pipeline, or (3) the full policy limit if the title was completelydefective.

An owner’s title insurance policy is unique because, for aone-time premium paid at the time of property purchase, the owner’s titlepolicy remains in effect as long as the insured owner or the heirs own theproperty.

In addition to recording errors, an owner’s title policyinsures against unexpected title risks such as title claims by prior owners,forged signatures in the chain of title (the major cause of title losses), andtitle claims of undiscovered heirs and ex-spouses.

TITLE DISPUTES ARE RESOLVED BY QUIET TITLE ACTIONS. Evenwhen the parties promptly record their deeds and other documents affectingproperty titles, conflicts still arise.

For example, the wording of a recorded driveway easementacross your property might be vague with the boundaries of the easementindefinite. Before you build on your parcel, if you can’t reach a writtenagreement with the easement holder, a quiet title lawsuit might be needed for acourt to determine the easement limitations.

Or if a party claims title by adverse possession, orprescriptive easement rights, a quiet title lawsuit is necessary to perfectthose possible rights in someone else’s property.

Divorces lead to endless title problems if agreementsaffecting marital real estate are not recorded. A frequent problem arises whenan ex-spouse is given possession of the marital home until the youngest childbecomes 18 (or 21) when the house is to be sold with the proceeds dividedbetween ex-spouses. If the spouse in possession refuses to sell the home asrequired by the divorce agreement, a quiet title lawsuit might becomenecessary.

CONCLUSION: Deeds and other documentsaffecting real estate titles should always be promptly recorded to preventunexpected consequences. Two basic recording rules are: “The first in timeis the first in right” and the first claimant to record his/her documentwins the race to the courthouse. When conflicts cannot be resolved from therecorded documents and the claimant does not have an owner’s title insurancepolicy, a quiet title lawsuit may become necessary to resolve the titledispute.

(For more information on Bob Bruss publications, visit his
Real Estate Center
).

Copyright 2006 Inman News

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