Deed of Trist Priorities_race-notice rule

Deed of Trust Priorities

This discussion covers the security of the borrowed funds through a deed of trust and related concepts of priorities.

Unless you are purchasing property all cash, a lender is usually involved in the purchase and sale of property.  The lender will require a title report.  A title report, among other items, identifies all recorded liens against the subject property that secure payment for the underlying debts.  For the liens identified on the title report, the lender will typically require their removal before the lender will fund a new loan.  Otherwise, for those purchase funds advanced by the lender, those funds will be junior to any previously loaned funds that have been secured against the property with a lien.  Although this is a lender issue, understanding the sale transaction from the lender’s perspective is helpful to both buyers and sellers.  Ultimately, the lender has the final say if the buyer will be able to purchase the house.

A deed of trust creates a lien on the purchased property when it is executed and delivered by the trustor/borrower to the beneficiary (usually the lender).  Once executed and delivered, the deed of trust takes priority as a security against the property in relation to any other liens previously recorded.  To ensure that priority, the lender will record the deed of trust.  For recording purposes, California employs a race-notice rule.  In short, this means that a lienholder’s deed of trust takes priority over any other claimed liens as long as the lienholder records his deed of trust prior to and without any knowledge of any other lienhold interest purportedly secured against the property.  (First Bank v. East West Bank (2011) 199 Cal. App. 4th 1309, 1313.)  This is the same race-notice standard that applies to the actual ownership of property.  That is, someone who does not record their deed to the property may lose his or her ownership interest in the property to someone else who in good faith purchases the property without knowledge of the other person’s ownership claim to the property.

As will be discussed in future blogs, other real property interests that affect the priority of a recorded deed of trust include, but are not limited to, interests such as leases, contracts, attachments, judgments, execution and mechanics liens, and tax liens. Thus, if a leasehold interest exists prior to the deed of trust, that leasehold interest will take priority over the deed of trust.

Based on the rules above, the lender will almost always record its interest in the property so that it shows in the chain of title.  None of the above should be mistaken for the rule that a lien is valid and enforceable between the parties to the deed of trust, even if the deed of trust is not recorded.  (Cal. Civ. Code §1217 [An unrecorded instrument is valid as between the parties thereto and those who have notice thereof].)  The borrower will always be on the hook for repaying the loan.  The message here is that the lender will almost always record their deed of trust to avoid any issues of priority.  Recording aside, however, knowledge of the lien will always be paramount.  An unrecorded lien will take priority over any future lienholder who records their respective lien with knowledge of the unrecorded lien.  (RNT Holdings, LLC v. United General Title Insurance Company (2014) 230 Cal. App. 4th 1289, 1296–1297.)

Our real estate attorneys at Schorr Law have a great deal of experience with real estate matters and all types of real estate disputes. To see if you qualify for a free 30-minute consultation, contact us today!

 

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