Notice and Race-Notice Jurisdictions
Video-Course: Mortgage Execution: Recording Requirements, Documentation, and Closing Procedures-Module 2 of 5
Bona-fide Purchaser (for value):
This subchapter discusses the complications that arise when the same property is conveyed to two or more different grantees by the same person. Put more colloquially, this subchapter deals with the “problem of the dirty double dealer.” For example:
Oleg conveys Whiteacre to Andrew on October 1 by deed. On October 15, Oleg draws up another deed to Whiteacre and conveys Whiteacre to Brenda. Who gets Whiteacre, Andrew or Brenda? In this case, of course, Oleg is the “dirty double dealer.” He conveyed the same property to two different people.
The answer to the question posed by this hypothetical depends, in large part, on which party, if any, recorded their deed. In the last subchapter, we discussed the recording system. In this subchapter, we discuss, to a large extent the consequence of recording, or failing to record, your deed.
The simplest case occurs when neither party records their deed at all. The rule in that case is simple. Where neither party records at all, the first transferee defeats the second transferee. This was the common law rule that existed until the recording systems were instituted. The logic behind it is simple. Once the first conveyance occurs, the transferor no longer has title to the property. Therefore, he or she has no right or power to transfer it to the second transferee. The second transfer was simply a meaningless transfer between two parties with no relevance to the ownership of the property. For example:
Bilbo conveys Bag End to Frodo on October 10 by deed. On October 15, he conveys Bad End to Merry, also by deed. Under the common law rule, and under the current rule, if neither deed is ever recorded, Frodo would own the rights to Bag End, because, by the time Bilbo transferred Bag End to Merry on October 15, he no longer owned it and thus had no power to transfer it to Merry.
The problem with this rule is that it does nothing to encourage the recording of deeds. Quite the contrary, once the first transferee receives the property, he or she would win over a subsequent purchaser anyway, so there is no point in recording the deed. Therefore, the rules have been altered to encourage people to record their deeds as soon as possible after they receive the deed.
Therefore, a rule has developed in all jurisdictions that states that the second transferee will prevail over the first transferee as long as:
- The second transferee is a bona-fide purchaser for value. A bona-fide purchaser for value is a party who bought the property for fair consideration (a fair price) and who acted in good faith in that he bought the property without notice that the property had previously been sold to somebody else;
- The second transferee recorded his deed before the first transferee recorded his deed.
Again, the logic behind this rule is simple. We want to encourage people to record their deeds. In this case, the first purchaser was negligent in failing to record her deed. Therefore, since somebody has to lose out on the property, we would rather have the party who was negligent in failing to record their deed lose out than the innocent second purchaser who bought the property in good faith and did record the deed. Here's an example:
Bilbo sells Bag End to Frodo and conveys Bag End to Frodo on October 10 by deed. Frodo fails to record his deed. On October 15, Bilbo sells and conveys Bag End to Merry, also by deed. Merry did not know of the earlier sale to Frodo. Merry records his deed on October 16. Frodo finally records his deed on October 18. Under this rule, which is applied in all U.S. jurisdictions (and unlike the common law rule, of course), Merry would prevail over Frodo because he is a subsequent bona-fide purchaser for value who did not have notice of the earlier sale and who recorded his deed before Frodo did. Frodo is therefore out of luck. (Of course, he can still turn around and sue Bilbo for his purchase money back.)
However, if the first transferee records his or her deed before the second transfer happens, then the first transferee will prevail.
The reason for this is that the second purchaser cannot, by definition, be a “bona-fide” purchaser in this case. Before people buy property, they are expected to do a title search. Since the first deed is recorded before the second sale, the second buyer is presumed to know of the first sale, as a proper title search would have uncovered the existence of the first sale. Thus, even if the second buyer did not know of the first sale, this can only be because of the second buyer’s negligence in not completing a proper title search. The second buyer is, therefore, not worthy of protection as a bona-fide purchaser for value. For example:
Bilbo sells Bag End to Frodo and conveys Bag End to Frodo on October 10 by deed. Frodo fails to record his deed. On October 12, Frodo records his deed. On October 15, Bilbo sells and conveys Bag End to Merry, also by deed. Merry records his deed on October 16. In this case, Frodo will prevail over Merry because Merry is not a bona-fide purchaser. Either Merry did a title search and knew of the earlier conveyance and therefore was not a good faith buyer or he failed to do a title search and was therefore negligent in not knowing about the earlier transfer. Either way, Merry is not considered a bona-fide purchaser. Therefore, Frodo will get Bag End.
An interesting issue arises when the first transferee records his deed after the second transfer, but before the second deed is recorded. For example:
Bilbo sells Bag End to Frodo and conveys Bag End to Frodo on October 10 by deed. On October 15, Bilbo sells and conveys Bag End to Merry, also by deed. Merry did not know of the earlier sale to Frodo. Frodo records his deed on October 16. On October 18, Merry records his deed. On the one hand, Merry was a subsequent good faith purchaser for value. On the other hand, Frodo recorded his deed first. So, who wins?
The outcome of this case is a split among jurisdictions. Some jurisdictions protect the subsequent bona-fide purchaser (Merry) even if he or she does not record before the first purchaser (Frodo). These jurisdictions feel that a bona-fide purchaser should be protected as long as he did not have notice of the first sale prior to making his purchase. These jurisdictions are known as “notice” jurisdictions.
A typical “notice” statute will read something like this:
“No conveyance is valid against a subsequent bona-fide purchaser who has no notice of the original conveyance, unless the conveyance is first recorded.”
In other words, the first purchaser’s deed has to be recorded before the second purchase to defeat the second good faith purchaser. Thus, in the above case, Merry would prevail.
Other jurisdictions feel that the more important policy concern is to encourage the prompt recording of deeds. Therefore, these jurisdictions will allow a second bona-fide purchaser to prevail against the first purchaser, if and only if, the second purchaser (Merry) recorded first, before the first purchaser (Frodo). These jurisdictions are known as “race-notice” jurisdictions.
A typical “race-notice” statute will read something like this:
“No conveyance is valid against a subsequent bona-fide purchaser who has no notice of the original conveyance and who has recorded the deed to his conveyance first.”
In other words, the second purchaser, to prevail, must be a bona-fide purchaser and must record his deed before the first purchaser does. Thus, in the above case, Frodo would prevail.
Finally, it should be noted that there is a third type of jurisdiction, called the “race” jurisdiction. These jurisdictions, few though there are, simply look to which party recorded their deed first. Whichever party records first prevails, even if that party did not purchase the property in good faith! Thus, it is a “race” to get to the records office and record your deed first. For example:
Bilbo sells Bag End to Frodo and conveys Bag End to Frodo on October 10th by deed. On October 12th, Merry tells Bilbo he’d like to buy Bag End. Bilbo responds, “sorry, I already sold it to Frodo.” Merry says “Pleeease; I’ll pay you double whatever Frodo paid you.” Bilbo says “Okay; I’ll sell it to you, but realize that I already sold it to Frodo.” Merry buys Bag End from Bilbo. Merry records his deed on October 13th. Frodo records his deed on October 14th. In almost all jurisdictions, Frodo would win because Merry is not a bona-fide purchaser. He knew that Frodo already bought that same property. However, in a “race” jurisdiction, Merry would win because he recorded his deed before Frodo recorded his, even though Merry is not a good faith purchaser.
Note the following diagram: