Title Defect: Rights Of Third Parties

Title Defect: Rights Of Third Parties

2013 Odom, Suzanne (00512165)

by Suzanne C. Odom, Montgomery & Andrews, P.A.

A.  THE CRITICAL ROLE OF NOTICE

Notice is critical in almost every case involving the rights of third parties to real property versus the rights of an erstwhile bona fide purchaser for value.  A bona fide purchaser for value is one who has in good faith paid value for real property and is without actual or constructive notice of competing claims to the property’s title. Kokoricha v. Estate of Keiner, 2010-NMCA-053, ¶ 27, 148 N.M. 322, 329.  As reflected in the foregoing definition, there are two main types of notice, constructive and actual.  Actual notice is “such notice as is positively proved to have been given to a party directly and personally, or such as he is presumed to have received personally because the evidence within his knowledge was sufficient to put him upon inquiry.” Black’s Law Dictionary, Sixth Ed. (1990), p. 1062.  Constructive notice “is information or knowledge of a fact imputed by law to a person (although he may not actually have it), because he could have discovered the fact by proper diligence, and his situation was such as to cast upon him the duty of inquiring into it.  Id. Constructive notice is also commonly referred to as inquiry notice.

Although the potential sources for constructive notice are varied, the most common sources for purposes of determining title to real property in New Mexico are the real property records for the county in which the property is located and physical inspection of the property itself.  With respect to the former, New Mexico’s recording statutes, NMSA 1978, §14-9-1 et seq., provide that documents that have been properly acknowledged and recorded with County Clerk in the county in which the real estate is located “shall be notice to all the world of the existence and contents of the instruments so recorded from the time of recording.” Section 14-9-2; City of Rio Rancho v. Amrep Southwest Inc.,2011-NMSC-037, ¶39, 260 P.3d 414 (“The purpose of requiring the recording of instruments affecting real estate in the county where the property is situated is to provide ‘a place and a method by which an intending purchaser . . . can safely determine just what kind of title [the purchaser] is in fact obtaining.”) Constructive notice of the “existence and contents” of an instrument means notice not only of the rights created by the instrument itself, but also of rights created by any document referenced in the recorded  instrument.  A simple example of this would be a recorded deed containing language that it is given subject to an easement in favor of John Doe.  The recording of such a deed gives notice of both the deed and the easement in favor of John Doe.

Where documents are unambiguous, the process of determining the rights of third parties, if any, should be relatively straight forward, requiring only a thorough reading of the recorded documents, together with a similarly thorough review of any documents referenced therein.  In this connection, New Mexico’s Supreme Court recently clarified that extrinsic evidence may not be used to vary the terms of a facially unambiguous instrument.  Amrep, 2011-NMSC-037, ¶ 38.  The Court explained that situations involving recorded instruments and third parties are different from ordinary contract situations because of the heavy emphasis placed on the written expressions of the parties’ intent [when interpreting recorded instruments] and because a recorded document “is often the primary source of information available to a prospective purchaser of land.”  Id. at ¶ 36-37 (distinguishing Mark V, Inc. v. Mellekas, 114 N.M. 778, 781, 845 P.2d 1232, 1235 (1993) and C.R. Anthony Co. v. Loretto Mall Partners, 112 N.M. 504, 508-509, 817 P.2d 238, 242-243 (1991)).  Thus, the Court concluded that “[t]o allow extrinsic evidence to establish an ambiguity in the meaning of language in a [recorded] plat, when the language itself is unambiguous, would frustrate the purpose of our law that governs the recording of instruments affecting real estate.” Id. at 38.

Not all third party rights are of record, nor need they be to be binding on a purchaser of property, however.  Possession of land by a person other than the owner of record can be sufficient to trigger inquiry notice.  See Id. at ¶29,260 P.3d at 423.  For example, the presence of someone other than the owner living in a residence on a property would create inquiry notice as to whether this person has occupancy rights under an unrecorded lease.  See Hunt v. Ellis, 27 N.M. 397, 399, 201 P. 1064, 1066 (N.M. 1921).  If there is a power line crossing a property, the property may well be subject to a utility easement, regardless of whether any such easement appears of record.  See Cunningham v. Otero County Electrical Coop., 114 N.M. 739, 845 P.2d 833.

(N.M. App. 1992) (Cooperative established prescriptive easement to power line over property where property owners admitted they saw power line when they purchased property and cooperative established continuous and uninterrupted use for prescriptive period).  Further, as most lenders understand, it is essential when making a secured construction loan to not only conduct a title search, but to also conduct a site visit to ensure that no work on a project has commenced prior to the recording of the mortgage, given that lenders are charged with the knowledge such an inspection would provide and that issues of priority under New Mexico’s mechanics and material men lien statutes, NMSA 1978, §§ 48-2-1 through 48-2-17, are determined based on when any work on a project first commences. See Valley Federal S&L Assn. v. T-Bird Home Centers, Inc., 106 N.M. 223, 741 P.2d 826 (1987); Pioneer Svgs& Trust v. Rue, 109 N.M. 228, 784 P.2d 415(1989).

It is worthwhile noting that open possession does not always create a duty to investigate.  In Amrep, the New Mexico Supreme Court reiterated that the acts sufficient to trigger the duty of further investigation are necessarily varied and circumstantial. Id. At ¶ 29.  Further, “if all signs of possession can be attributed to and are consistent with ownership bythe owner of record, further investigation is not required. Id. at ¶30.  One of the earlier cases exploring this issue was Hunt v. Ellis, supra,a case involving a purchaser of a ranch holding title under an unrecorded deed (Hunt) versus a subsequent purchaser (Ellis), who recorded his deed prior to the recording the deed to Hunt. Before and after purchasing the subject property, Hunt lived on an adjoining parcel and conducted ranching operations on the land at issue.  Although the seller of the property (Zivansky) vacated his residence on the subject property after selling to Hunt, he later returned to live there for a short time while working for Hunt.  During this period, Ellis visited the property and purchased it from Zivansky.  Finding that there had been no perceptible change in occupancy patterns or ranching activities on and around the subject property, the Court held that Hunt’s “possession” of the property did not put Ellis on inquiry notice regarding Hunt’s rights therein. Id. at 399, 201 P. 1066.

The New Mexico Supreme Court recently reaffirmed this principal.  In Amrep, the City of Rio Rancho claimed an open space easement over a parcel identified on a recorded subdivision plat as being encumbered only by a drainage easement. 2011-NMSC-037, 260 P.3d 414. The City based its argument, in part, on the fact an agent for the party who purchased the subject parcel from a successor in title to Amrep Southwest, Inc. knew that the City had an easement over that the subject parcel, and that the parcel remained open space surrounded by development for more than twenty years.  The Supreme Court rejected this argument, finding that the lack of development on the parcel “even when viewed in contrast to the surrounding development, fails to raise a reasonable inference than Amrep, and subsequently the Mares group, made the decision to leave the parcel undeveloped . . . .” Id. at ¶31.

B.  RIGHTS OF PARTIES UNDER UNRECORDED LEASES

As noted elsewhere in these materials, leases of an initial term plus option terms in excess of five years (or memoranda of the material terms of such leases)1 must be recorded in order to impart constructive notice. NMSA 1978, §14-9-1. Section 14-9-3 provides that “[n]o deed, mortgage or other instrument in writing not recorded in accordance with Section 14-9-1 NMSA 1978 shall affect the title or rights to, in any real estate, of any purchaser, mortgagee in good faith or judgment lien creditor, without knowledge of the existence of such unrecorded instruments.” However, as discussed above, the presence of a non-owner in possession of property may trigger an obligation to inquire whether there is a lease or other instrument imparting possessory rights and, if so, to investigate the scope of rights granted thereunder. Best practice further requires investigation into whether there are any other agreements outside of the lease that may give the tenant off-record rights to the property (such as an option to purchase).

Note that, in cases involving residential foreclosures or the foreclosure on any “federally-related mortgage loan,” the Protecting Tenants at Foreclosure Act of 2009, codified at 12 U.S.C. Section 5201 et seq.may create certain statutorily implied rights in favor of tenants, often regardless of whether a written lease exists. This act provides that the interest of an immediate successor in interest to such a property is taken subject to an obligation to provide a tenant with notice to vacate a minimum of 90 days before the effective date of the notice and, in certain circumstances, preserves the tenant’s right of occupancy through the end of the remaining lease term. This act is currently slated to sunset on December 31, 2012.

C.  RIGHTS OF THIRD PARTIES UNDER RIGHTS OF FIRST REFUSAL, OPTIONS, REVERSIONARY INTERESTS, ETC.

Absent evidence of actual knowledge on the part of a subsequent purchaser or lender, rights of first refusal, options, reversionary interest and the like must appear somewhere in the public record to be binding on a subsequent purchaser or lender.  The problem is that these types of interests are frequently contained within, or merely referenced by, other recorded instruments, such as deeds and leases.  This underscores the need to read carefully recorded documents in their entirety, including attachments, to obtain copies of all documents referenced in recorded documents and to read any such documents carefully as well.

D.  CURES

1.  Acquire the interest.

The simplest means of resolving any third-party interest in terms of mechanics is to acquire the interest.  For a fee interest, obtain a deed. For an easement, obtain a vacation of easement.  This method is not always practical where the acquisition price is too high or the holder of the interest is otherwise not cooperative.

2.  Rights of First Refusal/Options.

For rights of first refusal and options, evaluate whether the rights at issue have expired by their terms without exercise.  If so, no “cure” may be needed if the lender/buyer finds any attendant risk acceptable and/or a title company is willing to insure over the matter.  If additional comfort is required by the purchaser/lender/title company, and the third party holding the right will not execute an acknowledgement that the right has expired, explore whether a unilateral notice of expiration will suffice.  [A drafting tip in this connection: include a provision in the grant of the right or option allowing the grantor authority to unilaterally record notice of expiration and further providing that such right survives expiration of the grant.]  If all else fails, a declaratory judgment action to void the right may be the only remaining option.

3.  Leases.

For leases, estoppel agreements should be obtained from tenants (parties in possession) confirming that the rights and obligations of the parties are fully set forth in the written lease.  Ideally, this should be done before any purchase or loan is made.  Lenders (and tenants) may also protect their interests through subordination nondisturbance and attornment agreements (SNDA), which subordinate tenant rights to those of the lender and provide that tenant’s rights to leased premises are not disturbed (nor is the tenant’s obligation to pay rent) in the event of default and foreclosure. Finally, pay careful attention to the terms of the lease.  A lease having a periodic term, for example, may be extinguished by giving proper notice of termination.

4.  Construction Loans/Mechanics and Materialmen Liens.

Obtain subordination agreements from the general contractor and all subcontractors (especially major subcontractors) pursuant to which the contractors subordinate their rights to the lender’s lien. Also, consider whether risks may be mitigated through title insurance.  A construction lender may obtain either a construction loan policy or a standard loan policy.  If a construction loan policy is used, disbursements are insured by either ATLA Form A (NM Form 18) or ATLA Form D (NM Form 19).  If a standard loans policy is issued, it will contain the following additional exception:

Pending disbursement of the full proceeds of the loan secured by the mortgage or deed of trust set forth under Schedule A hereof, this policy insures only set forth extent of the amount actually disbursed but increases as each disbursement is made, in good faith, and without knowledge of any defect in, or objection to, the title, up to the face amount of the policy.  Prior to each disbursement of proceeds of the loan, the title must be continued down to such time for possible liens or objections intervening between the date hereof and the date of such disbursement.

Disbursements are insured through the Pending Disbursement Down Date Endorsement (NM Form 22).

5.  Miscellaneous Other Liens/Defects.

Lenders have traditionally be charged with the duty of releasing mortgages/deeds of trust upon full satisfaction of the secured debt, see NMSA 1978, § 48-7-4, and face fines and penalties for failing to do so under NMSA 1978, § 48-7-5.  Title insurers may also record releases following the procedures set forth under NMSA 1978, § 48-7-4.1.

The 15-year statute of limitations established under NMSA 1978, § 37-1-28 applies to bar challenges to instruments based on certain technical defects, including the fact that:

  1. the instrument was not signed by the proper officer of a corporation;
  2. the record does not show any authorization for the instrument by the board of directors or stockholders, or both, of a corporation;
  3. the instrument was executed by a corporation:
    • (a)    that had been dissolved;
    • (b)   whose articles of incorporation had expired;
    • (c)    whose certificate of incorporation had been cancelled or revoked; or
    • (d)   whose certificate of authority to transact business in this state had been revoked or withdrawn;
  4. the executor, administrator, guardian, assignee, receiver, master, agent or trustee or other agency making the instrument signed or acknowledged it individually rather than in his representative or official capacity;
  5. the instrument was executed by a trustee without record of judicial or other determination of his authority or of the verity of the facts recited in the instrument;
  6. the officer, who took the acknowledgment of the instrument and who had an official seal, did not affix his seal or show the date of the expiration of his commission on the certificate of acknowledgment; or
  7. the wording of the consideration in the instrument may or might create an implied lien, other than an express vendor’s lien, in favor of the grantor.

6.  The Last Resort – Litigation.

If all else fails, legal action may be required. Depending on the defect, this may be in the form of, among other things, a declaratory judgment action, a petition to cancel lien, an action for slander of title, or a quiet title action.

1 “’[M]emoranda of the material terms of a lease” means a memorandum containing the names and mailing addresses of all lessors, lessees or assignees; if known, a description of the real property subject to the lease; and the terms of the lease, including the initial term and the term or terms of all renewal options, if any.” NMSA 1978, § 14-9-1.