Implied and constructive notice: title search fallibility and the rigidity of the constructive notice doctrine.

• Author: Weinstein, Morgan L.
• Position: Florida

Prudent purchasers of real property conduct title searches to ensure that the property is unencumbered by, among other potential defects, mortgages, liens, or restrictions. A purchaser frequently employs the services of attorneys or title search companies to review the chain of title of a particular piece of real property. Likewise, a lienholder on real property may require a title search on the property for which the lien is held. In order to fully foreclose a lien, the lienholder must establish that its lien is superior in right or title to the property owners' rights, as well as the rights of other lienholders. (1)

Problems arise when it is difficult to determine which documents must be searched. Those persons or companies charged with review of title documents first have to procure the documents to review. The pertinent documents may be gleaned from the use of private databases, review of plat books, and review of clerks' offices' indexes relating to real property. However, it is possible for a clerk's office to fail to properly index conveyances, resulting in a situation in which a purchaser or lienholder cannot adequately search liens or defects in title. Further, when property is ineffectively described within a mortgage, questions may arise as to whether the mortgage encumbers the ill-described property.

Currently, the answer to whether a described or referenced document or property description will be within the ambit of a conveyance or mortgage turns on a distinction: Is the document or property description referenced in the mortgage, or is it instead a part of the mortgage? If it is a part of the mortgage, a separate, more automatic application of Florida's recording statute will occur than if it is merely referenced in the mortgage. In Regions Bank v. Deluca, 2012 Fla. App. LEXIS 13986 *9 (Fla. 2d DCA Aug. 22, 2012), the Second District Court of Appeal affirmed the different tracks that recording and notice questions can follow, while at the same time highlighting the problems caused by Florida's approach to constructive notice.

Conveyancing and the Types of Recording Statutes

Title review is important because Florida law relating to real property is premised in part upon the legitimacy of conveyances, meaning that there are documents or writings which, in and of themselves, establish the transfer of interests in real property from one person to another. (2) There also may be recorded documents establishing mortgages or liens on the real property to be purchased. Such documents, though merely liens, fall within Florida's laws on recordation of conveyances. (3) In order for conveyances to be effectual against creditors or subsequent purchasers for value, they must be recorded. (4)

Every state has a recording statute or act, and recording statutes typically fall within one of three categories: 1) race; 2) notice; or 3) race-notice. (5) The type of recording statute in a particular state may determine who will prevail in actions relating to mortgages. Under a "race" recording statute, a subsequent mortgagee will prevail against a prior mortgagee if the subsequent mortgage is recorded before the prior mortgage. (6) Under a "notice" recording statute, a subsequent mortgagee who purchased for value and without notice of a prior mortgage will prevail against the prior mortgagee. (7) Finally, under a "race-notice" recording statute, a subsequent mortgagee who purchased for value and without notice will prevail against the prior mortgagee, if and only if the subsequent mortgage is recorded before the prior mortgage. (8)

The Fact of Notice

Florida is a "notice" state. F.S. 695.01 provides that "[n]o conveyance, transfer, or mortgage of real property, or any interest therein ... shall be good and effectual in law or equity against creditors or subsequent purchasers for a valuable consideration and without notice, unless the same be recorded according to law." (9) Therefore, under Florida law, a subsequent purchaser who purchases for value and without notice of a prior mortgage will prevail against the prior purchaser. The specific subjunctive exception in the Florida Statutes, "unless same be recorded according to law," is not so much a literal exception as it is a provision that the act of recording a conveyance places creditors and subsequent purchasers on notice. (10)

The recordation of conveyances, mortgages, or other liens on property, is emphasized because a recorded conveyance or lien of real property, or an interest therein, places creditors and subsequent purchasers on "constructive notice" of the prior conveyance. (11) In applying the notice provision of Florida's recording statute, Florida courts have held that notice may take three distinct forms: 1) actual notice; 2) implied notice; or 3) constructive notice. (12) A party has "actual notice" when the party has actual knowledge of the fact in question. (13) A party has "implied notice" of a fact when the party had a duty to make inquiry regarding such fact and the means of acquiring knowledge of such fact were present. (14) "Constructive notice" also arises from an inference of knowledge. However, unlike implied notice, a party has constructive notice when the inference of knowledge...