Paying Value for Property Interest - dummies

Paying Value for Property Interest

By Alan R. Romero

All recording acts but two of the race statutes protect a later interest from a prior interest only if the owner of the later interest paid value for it. The recording statutes are generally meant to protect people who would be harmed by the lack of notice of an existing interest in real property.

In other words, the statutes protect those who would rely on the state of title in deciding to pay substantial value and would lose some of that value if a prior unrecorded interest were valid against them. Those who pay no value for their property interests don’t lose any investment if it turns out that their interests are impaired or useless because of prior conflicting interests.

A person pays value for a property interest by giving anything of substantial economic value in exchange for the property interest, such as the following:

  • Money: The subsequent purchaser doesn’t have to pay the full value of the property in order to be protected by the recording statute. Courts generally agree that a purchaser is protected if she pays some substantial amount compared to the value of the property and not an amount that’s nominal or grossly inadequate. A person who receives a property interest by gift, will, or inheritance isn’t protected by the recording statute.

    A mere promise to pay money, even giving a mortgage to secure such a promise, isn’t payment of value. However, giving a promise to pay in the form of a negotiable instrument is payment of value if circumstances would make it enforceable regardless of whether the promisor receives good title to the property.

  • A loan: Many statutes expressly say that mortgagees are protected against unrecorded interests if they satisfy the other requirements of the statute. But even if the recording act doesn’t say that, courts all agree that a lender who loans money to a borrower and takes a mortgage to secure repayment has paid value as required for the protection of the statute.

    However, if the lender has already made an unsecured loan and then later takes a mortgage to secure repayment, the lender hasn’t paid value and isn’t protected by the recording act. In this situation, the lender didn’t pay value relying on the state of title, unless she agrees to somehow change the borrower’s obligation in a way that’s detrimental to the lender, like by extending the time for repayment.

    Likewise, a person who acquires a statutory lien against the property doesn’t pay value for her lien and therefore isn’t protected by the statute.

    For example, a person who gets a judgment against another automatically gets a statutory judgment lien against her real property, which allows her to sell the property to satisfy the judgment. Some recording statutes expressly protect those who hold judgment liens, but in most states a judgment lienor isn’t protected because she didn’t pay value to receive her lien.

  • Canceling an obligation: Canceling an existing debt or accepting a deed as performance of an outstanding obligation can be payment of value.