State recording acts enable people to determine whose interest prevails if interests in the same property have been conveyed to several parties. For instance, what if a piece of real estate has several encumbrances: mortgage debt, a mechanic’s lien, and others? We need to know the order of priority.
Deals are made based on these stakes, so it’s essential to know how to preserve claims in a piece of property. The best practice is to record any new interest promptly. This way, should there be any conflicting claim at a later date, the dispute can be settled.
The Race to Record: Three Different Rules
The general principle is to consider the first claimant to record an interest as the first in priority in relation to that asset.
Once an interest is recorded, the public is on notice that a claim exists in the property.
Specifically, the public has constructive notice. The notice exists and is there to see, because it is in the public land records.
That said, if multiple people claim an interest, the order of priority depends on whether the state applies:
- A race statute,
- A notice statute, or
- A race-notice statute.
To find out which of these three rules apply in a given state, check the state’s recording act. There are three types of rules followed by various states.
1. Race Statute
The race or “race to the courthouse” rule is the simplest. It is also today’s least common type of recording act. It says that whoever records first prevails over any later recordings.
In Delaware, for example, imagine an owner who sells two people an interest in the same property. Delaware is a race state. So, in this case, “the first person to record their deed is the legal recipient of the grantor’s rights to the real estate.”
3. Notice Statute
States following the notice rule take a different approach. These states consider a later buyer who pays fair consideration for the real estate its rightful owner, if there were prior unrecorded interests that the buyer did not know about. Sometimes an old interest isn’t possible to find in the title examination. So the good-faith buyer wins.
A notice statute encourages people to record their interests in a timely manner. But it can also leave the land records incomplete as the newer buyer may not have a strong incentive to record, and therefore the earlier buyer could make improvements to the property and lose the investment to a subsequent buyer who is slow in recording.
3. Race-Notice Statute
This is like the notice rule, with an extra incentive for a buyer to record promptly.
The buyer who pays a fair price for the home, knows of no earlier conflicting, unrecorded claims, and records first, wins. Anyone wishing to record later is barred from overturning the bona fide purchaser’s ownership claim.
For example, a person might have been bequeathed an interest in the property years before. That interest has never been recorded, and therefore the buyer had no constructive notice. The good-faith buyer, upon recording, divests the home of that earlier, unrecorded interest.
Note that the buyer, to become a bona fide purchaser, gave fair value for the property, and then recorded. What is fair value? It does not mean the current market value. It could significantly under the appraised value. As long as it is more than nominal consideration, the buyer’s interest is protected by the state’s the recording act.
California offers an example. An unrecorded conveyance is voided by a subsequent purchaser taking the property “in good faith and for a valuable consideration, whose conveyance is first duly recorded” in California, a race-notice state.
There are some exceptions to the rule. Race-notice states Ohio and Pennsylvania follow the simple race rule for mortgage liens. And, despite the general recording rules, assessments and taxes imposed by local governments take priority and must be paid. Certain mechanic’s liens must be paid, and when the work started is the key time for establishing priority over later liens.
Unpaid condo fees and special assessments must be paid, but case law can impact this. Thus, an unrecorded condo lien may, in some cases, be voided. Homeowners’ associations are well advised to file liens promptly—regardless of local practices.
Public Policy and Limitations
Recording acts do not force anyone to record a real estate document. In most states, the acts do help good-faith buyers receive and keep the value they bargained for. They do this by driving customary practice, supporting the creation of public records, and rewarding prompt recorders with legal protection.
In a race-notice state especially, anyone granted a recordable interest is motivated to record promptly, keeping the county records constantly updated.
Other policy benefits include the keeping of good records that serve as evidence of title for court challenges. Recording acts also make tax collection easier, by clarifying who holds taxable interests in real estate.
As for limitation, note that the recording acts protect good-faith purchasers only against recordable claims, traditionally related to conveyances. These include deeds, liens, mortgages, land contracts, and financing statements.
Note also that someone who receives the property as a gift, or for nominal consideration, or as a beneficiary to a will is not considered a bona fide purchaser. Recording acts were not designed to protect such a person against unrecorded claims.
The Key Takeaway? Recording a Claim Is Vital
Recording creates a reliable chain of title, ensuring transparency and public notice. When claims appear to conflict, their priority can be straightforwardly sorted by applying the state statute and the order of recording.
That said, recording acts can be difficult to apply to specific situations, and they do not protect even a good-faith buyer from every possible risk. As your county recorder of deeds is not permitted to offer you legal advice, it is always wise to consult with a lawyer in your county area who can advise you and help you to guard your interest in real estate.
Supporting References:
https://www.americanbar.org/groups/real_property_trust_estate/resources/real_estate_index/real_estate_residence_faqs/
https://www.deeds.com/recorder/california/
https://www.deeds.com/recorder/delaware/
http://www.illinoiscourts.gov/R23_Orders/AppellateCourt/2013/1stDistrict/1121944_R23.pdf