CALIFORNIA ADOPTS A RECORDING SYSTEM

CALIFORNIA ADOPTS A RECORDING SYSTEM

California was admitted to the Union by the United States on September 9, 1850. One of the first acts of the
Legislature of the new state was to adopt a recording system by which evidence of title or interests in the title
could be collected and maintained in a convenient and safe public place. The purpose of establishing a
recording system was to inform persons planning to purchase or otherwise deal with land about the ownership
and condition of the title. This system was designed to protect innocent lenders and purchasers against secret
sales, transfers, or conveyances and from undisclosed encumbrances/liens. The purpose of this system is to
allow the title to the real property to be freely transferable.

The California Legislature adopted a recording system modeled after the system established by the original
American Colonies. It was strictly an American device for safeguarding the ownership of and the encumbering
of land/property. Recording of sales, transfers, or conveyances and encumbrances/liens as part of a public
record was established to impart constructive notice. This system of recording is known as the “Race
Recording”, or as the “Race-Notice Recording” statute/law.

Actual v. Constructive Notice

Actual notice consists of express information of a fact. Constructive notice means notice given by the public
records. By means of constructive notice, people are presumed to know the contents of recorded instruments.
Publicly recording instruments of transfer/conveyance or to encumber/lien the title to real property imparts
constructive notice. For example, Civil Code Section 2934 enacted in 1872 states in part, “Any assignment of a
mortgage and any assignment of the beneficial interest under a deed of trust may be recorded, and from the time
the same is filed for record operates as constructive notice of the contents thereof to all persons…”.

Which Instruments May Be Recorded

The Government Code of California provides that, after being acknowledged (executed in front of a Notary
Public, or properly witnessed as provided by applicable law), any instrument or judgment affecting the title to
or possession of real property may be recorded. See Government Code Sections 27201, 27201.5, 27287, and
27288.

The word “instrument” as defined in Section 27279(a) of the Government Code “…means a written paper
signed by a person or persons transferring the title to, or giving a lien on real property, or giving a right to a
debt or duty.” A similar definition is set forth in a historic 19th century case. See Hoag v Howard (1880) 55
Cal. 564-567. The definition of an “instrument” does not necessarily include every writing purporting to affect
real property. However, the term “instrument” does include, among others, deeds, mortgages, leases, land
contracts, deeds of trust and agreements between or among landowners/property owners.

Purpose of Recording Statutes

The general purpose of recording statutes is to permit (rather than require) the recordation of any instrument
which affects the title to or possession of real property, and to penalize the person who fails to take advantage
of recording.

However, existing law includes examples where recording is required as a predicate to accomplish a defined
public policy objective. One such example is Civil Code Section 2932.5 that provides, “Where a power to sell
real property is given to a mortgagee, or other encumbrancer, in an instrument intended to secure the payment
of money …[T]the power of sale may be exercised by the assignee of the assignment if duly acknowledged
and recorded (emphasis added).”

Another example is in Business and Professions Code Section 10233.2 regarding perfecting ownership of
promissory notes or interests therein. This Section states in part “…the delivery, transfer and perfection shall be
deemed complete even if the broker retains possession of the note or collateral instruments and documents,
provided that the deed of trust or assignment of the deed of trust or collateral documents in favor of the lender
or purchaser is recorded in the office of the county recorder in the county in which the security property
is located, and the note is made payable to the lender or is endorsed or assigned to the purchaser
(emphasis added).”

Because of the recording of instruments of conveyance or encumbrance/lien, purchasers (and others dealing
with title to property) may in good faith discover and rely upon the ownership of title or an interest therein.
While the Government Code does not specify any particular time within which an instrument must be recorded,
priority of recordation will ordinarily determine the rights of the parties if there are conflicting claims to the
same parcel of land/property, i.e., the title thereto or an interest therein. The instrument recorded first in the
chain of title would generally achieve priority over subsequently recorded instruments (fact issues such as
subordination or actual notice may affect priority notwithstanding recording dates). The definition of the “Race
Recording” or “Race-Notice Recording” statutes/laws is intended to describe the manner of achieving priority
in the chain of title. Generally, the person winning the race gains priority.

The county recorder in the county within which the property is located must record instruments affecting real
property. If the property lies in more than one county, the instrument, or certified copy of the record, must be
recorded in each county in which the property is located in order to impart constructive notice in the respective
counties.

If it is necessary to record a document written in a foreign language, the recorder will file the foreign language
instrument with a certified translation. In those counties in which a photographic or electronic method of
recording is employed, the foreign language instrument and the translation may be recorded and the original
instrument returned to the party who requested recordation. See Government Code Section 27293.

When an Instrument is Deemed Recorded

Generally, an instrument is recorded when it is duly acknowledged or verified and deposited in the recorder’s
office with the proper officer and marked “filed for record.” It is the duty of the recorder to number the
instrument in the order in which it is deposited, including the year, month, day, hour, and minute of its
reception, and indicate at whose request it was “filed for record.” The contents of the document are transferred
to its appropriate book or image of records upon the page or pursuant to the number endorsed on the document,
and the original document is returned to the party who left it for recording.

The recorder indexes all recorded documents in alphabetical order according to the names of the grantors and
grantees or mortgagors or mortgagees, which terms include holders of beneficial interests in and
trustors/borrowers of deeds of trusts, and the name or nature of the document. The documents are also indexed
by date of recording and the recording reference. See Government Code 27230 et seq.

Effect of Recording as Imparting Notice

The courts have ruled that the benefits of a recording statute are not available to one who takes title with actual
notice of a previously executed though unrecorded instrument. For example, possession of land/property by one
other than the seller is actual notice to an intending buyer sufficient to impose a duty to inquire about the
possession. Despite the recording statutes and the assurance they give about the status of title, a prudent
purchaser should inspect the premises in person or through a trusted agent.

The obligation to inspect includes inquiring of persons in possession of the real property (e.g., a tenant or
lessee), what claim such persons have to occupy and use the property, and is there a written agreement
supporting the claim. The agreement may be a month-to-month tenancy, a leasehold or an estate for years, a
land contract of sale, an option to purchase, a lease with a first right of refusal, etc. Such a claim would be

imparted by actual notice because of the occupancy of the persons in possession. The agreement evidencing the
claim need not be recorded to affect the title to the real property.

In addition to the foregoing, there are many types of unrecorded interests that a prospective purchaser may
discover during a physical inspection of property. For example, a pathway or sewer line may mean adjoining
owners have an unrecorded easement. Lumber or recent carpentry work may mean certain persons have a right
to file mechanics’ liens.

The recording laws do not protect the party “first to record” against what may be discovered through a physical
inspection, nor do standard form title insurance policies cover the situations previously described. As
previously mentioned, the inspection of a property to be purchased or encumbered is recommended and advice
from a qualified professional is often required (e.g., lawyer, title officer, civil engineer, etc.) before proceeding
to purchasing or encumbering the land/property. The intended title insurer should be asked about extended
coverage to insure against the unrecorded interests that may be discovered by physical inspection as discussed
in this section.

Priorities in Recording

The California recording statutes encourage prompt recording of conveyances and encumbrances and prohibits
use of the constructive notice doctrine as an aid to proven fraud. The recording laws protect only innocent
parties.

Certain priorities are affected by statutory provisions. For example and for the purposes of establishing priority,
existing California Law distinguishes between a mortgage and deed of trust given for the price of real property
(purchase money mortgage) from such instruments of encumbrance given to refinance or further encumber the
property (non-purchase money mortgage). The former have priority over all other liens created against the
purchaser, subject to the operation of the recording laws, and the later do not have priority over the defined
liens. Further, the priority to be established for mortgagees or deeds of trust on an estate for years in real
property (leasehold) shall be determined in the same manner as establishing the priorities of such liens against
the title of real property. See Civil Code Section 2898.

Not all liens on real property rank in priority according to their respective dates of recording. For example, with
respect to the same parcel of property, A executed a mortgage in favor of B dated June 1 and recorded June 20.
A executed a mortgage in favor of C dated June 10 and recorded June 15. C’s mortgage will be superior in
priority to B’s only if C did not have, on or prior to June 15, notice of B’s mortgage.

Special Lien/Encumbrance Situations

Liens and encumbrances are discussed again later in this chapter. However, it will be helpful to note here the
impact of the recording laws on liens and encumbrances. Liens are imposed for monetary claims against the
title to real property or for the performance of an act in connection therewith. Liens are encumbrances, but there
are encumbrances that are not monetary claims, e.g., an easement. These forms of encumbrances typically
affect the condition or use of the property. It can be said that all liens are encumbrances, but not all
encumbrances are liens.

California Law refers to mortgages and deeds of trust as functional equivalents. The historic distinctions
between the two instruments include the application of the “lien” vs. “legal title” theories (to be discussed later
in this chapter), and the use of a third party trustee with certain defined powers in a deed of trust but not in a
classic mortgage instrument. The perceived limitation of the use of the trustee in a deed of trust was eliminated
in 1986 through the enactment of Civil Code Section 2920. For the purposes of this chapter, the terms
“mortgage” and “deed of trust” are used interchangeably and for each other as functional equivalents, as
defined in current California Law.

A lender/encumbrancer will often agree in the deed of trust (the senior instrument) to make “future advances”
as a part of a secured loan transaction. Another lien/encumbrance (for example, a junior deed of trust or a
mechanic’s lien) may intervene between the time of recordation of the lender’s senior deed of trust and the time
of a “future advance”. A question of priority is then posed regarding the sums advanced by the senior lender.

When the terms of the senior deed of trust obligate the lender to make “future advances” (e.g., progress
payments under a construction loan), these “obligatory advances” have the same priority as the loan secured by
the senior deed of trust, regardless of intervening liens (monetary claims). See Civil Code Section 2884.

In other cases, the senior lender may have the option of making “future advances” of money to the
borrower/trustor, but is not required to do so. These “optional advances” for priority purposes date from the
time the advance is made, unless the lender can show no actual or constructive notice of intervening liens. This
does not mean lenders are excused from checking the public record.

The issue of “future advances” is of particular concern in loan products known as Home Equity Lines of Credit
(“HELOC”). Such loan products have become popular in the last 15 to 20 years. The advances made as part of
a HELOC loan transaction are generally “optional”, i.e., defined conditions must first be met prior to the lender
extending to the borrower/trustor additional credit. To facilitate the use of these loan products, the title
insurance industry has offered endorsements to the institutional lending community (financial depository
institutions and certain licensed lenders) maintaining for the purposes of the coverage provided the priority of
the “optional advances” to protect the interests of the lenders making HELOCs. See Civil Code Section 2884.

Mechanics’ liens generally relate back to the time of the commencement of the construction work as a whole.
Thus, a deed of trust must be executed, delivered, accepted and recorded prior to commencement of any work
regarding the security property to assure the priority of the construction loan secured by the deed of trust over
the claims that may be made by contractors, laborers, material houses, suppliers, design professionals and the
like in the form of mechanics liens. See Civil Code Section 3134.

Liens for real property taxes and other general taxes, as well as special county and municipal taxes and
assessments are superior in priority to the lien of any mortgage or deed of trust regardless of the date of
creation, including execution, delivery, acceptance, and recording. California Law provides that any tax or
assessment declared a lien on real property should be given priority over all other liens, including judgments,
deeds, mortgages, deeds of trust, etc. See Revenue & Taxation Code Section 2192.1.

Provided they are bona fide encumbrances/liens, deeds of trust and mortgages recorded prior to general federal
tax liens or state tax liens are superior in priority to those liens. However, subsequent to the non-judicial
foreclosure of the security property, the IRS has asserted the priority of its tax claims are altered to a senior
position when the assets to which such claims attached become the cash available from the foreclosure
proceeds.

Persons having priority may by agreement waive this priority in favor of others. An agreement to do this is
called a “subordination agreement.” These agreements are often executed in connection with deeds of trust to
subordinate a senior encumbrance/lien to a later recorded junior encumbrance/lien. An example is where a
landowner’s/property owner’s “purchase-money” deed of trust (securing a debt in the form of a seller “carry-
back” established at the time the security property was purchased) is subordinated by agreement to a
construction loan to finance the improvements to be made to the property.

Without such priority of claim for payment against the real property, a construction lender would typically
decline to extend credit and, therefore, funds would not be available for the building contractor to expend time
and materials on the construction project.

In certain loan transactions, statutory requirements are imposed regarding the use of subordination clauses.
These requirements include notice of the existence of a subordination clause, and a disclosure of the contents of
the subordination agreement. While these requirements apply to loans in the amount of $25,000 or less, they
represent good guidelines to be considered when engaging in the use of subordination clauses and agreements.
See Civil Code Section 2953.1 et seq.

As previously mentioned, a mortgage or deed of trust given for the purchase price of real property at the time of
the conveyance of the security property has priority over all other liens created against the purchaser, subject to
operation of the recording laws. See Civil Code Section 2898.

Two or more deeds of trust recorded at the same time (concurrently) may contain on the face of each deed of
trust (as part of an industry practice) a recital about which is intended by the parties to be first, second, or third
in priority. The recitals can be effective subordination agreements with the informed knowledge and consent of
the lenders and the trustors/borrowers (referred to as mortgagors).