California Partition Law Blog
The purpose of this article is to explain what a bona fide purchaser for value is and how that status impacts someone’s property rights. A bona fide purchaser for value (or bona fide purchaser) is someone who acquires a property interest or encumbrance like a property, mortgage, or lease, and meets two specific criteria. A bona fide purchaser must (1) lack knowledge or notice that a prior claim exists on the property and (2) give adequate consideration for that property. (Melendrez v. D & I Inv., Inc., (2005) 127 Cal. App. 4th 1238, 1251.)
Why is the lack of knowledge of a prior claim necessary?
A bona fide purchaser cannot have any knowledge of any prior claims. This is because their purchase makes any unrecorded interest, like the verbal sale of a property, void. (Civ. Code § 1214.) To make sure they have no knowledge of other claims, a bona fide purchaser must make a reasonable inquiry to see if anyone else has a claim to the property. Buyers can do this by hiring a company to conduct a title search. A title search examines public records to determine who legally owns a property. Having this search done ensures there are no defects in the seller’s ability to transfer the property or other competing claims. Someone’s purchaser status is determined at the time the interest or lien is acquired. So, once that person has bought the property, the need for the buyer to not know of any competing claims ends. This is important because any information learned after acquiring the interest does not affect someone’s status as a bona fide purchaser or encumbrancer.
What is adequate consideration for a bona fide purchase?
To be a bona fide purchaser, the buyer must exchange “value” for the property and not just get it for free like a gift. (Horton v. Kyburz (1959) 53 Cal. 2d 59, 65.) This means the bona fide purchaser is giving adequate consideration in exchange for the property. Consideration is what is bargained for between parties in a transaction. In most cases with property, it is money. Because the bona fide purchaser bought the property genuinely believing there was nothing interfering with the property, they are given special protections or priorities.
The benefits of being a bona fide purchaser
Being a bona fide purchaser is important because it means any other unrecorded interests in the property are void. If the property’s title is in dispute, a bona fide purchaser can establish their status through a quiet title action, where a court will recognize them as the title holder. Being a bona fide purchaser can also be used as an affirmative defense. (Basch v. Tide Water Associated Oil Co. (1942) 49 Cal.App.2d.Supp. 743, 746.) It acts as a defense for future purchasers’ title against competing claims, as long as the future purchaser had no notice at the time of purchase. This means when someone challenges the title to a property, if the buyer can show they were a bona fide purchaser, they are able to defeat the competing claim.
The priority given to bona fide purchasers over others is significant because of the California “rule of priorities.” The rule of priorities is based on the race-notice principle. The race-notice principle means liens on property have priority based on when they were created. (Civ. Code, § 2897.) By giving priority to competing interests, it makes it easier to settle disputes over the same piece of land. The rule of priorities “ranks” the priority of the interest based on when that interest was recorded. A person gets interest and priority as a bona fide purchaser when they first record the instrument, like a deed. This creates the buyer’s interest. (Civ. Code, §§ 1107, 1214.) A bona fide purchaser gets priority over someone with a prior unrecorded interest. An unrecorded interest could be a deed that was contested or unsigned. Prior unrecorded conveyances have priority over later interests acquired by non-bona fide purchasers. If a prior interest is unenforceable between parties when it is created it is unenforceable against future parties, bona fide purchaser or not. (Boye v. Boerner, 38 C.A. 2d 567, 569, (1940).)
What are some examples of prioritizing interests?
For example, Julie bought property from Shawn as a bona fide purchaser, meeting the two requirements. If Shawn’s friend had an unrecorded deed for the property, Julie’s interest would prevail as a bona fide purchaser. This is because the friend’s interest was a prior unrecorded interest. However, if Julie knew of the deed, Shawn’s friend’s interest would prevail. A deed is enforceable even if it is not recorded, and Julie in this scenario is not a bona fide purchaser.
Alternatively, if Julie was going to be gifted the property, Shawn’s friend’s interest would prevail as well. Julie would not have exchanged value for the property and thus would not meet all the requirements to be a bona fide purchaser.
If Shawn had promised the property to his friend in passing without writing it down, it is unlikely to be enforceable against Julie whether or not she was a bona fide purchaser. A promise in passing without writing is unlikely to be enforceable between Shawn and his friend and thus would not be enforceable against anyone else like Julie.
Conclusion
A bona fide purchaser is someone who acquires a property interest or encumbrance and (1) does not know a prior claim exists on the property and (2) gives adequate consideration or something of actual value for that property. The bona fide purchaser must not have actual or constructive notice of any prior claims. The status of bona fide purchaser means the buyer gets priority over unrecorded interests. As such, the ability to show a bona fide purchase was made is useful in quiet title disputes and as a defense in future property sales.
The Underwood Law Firm has a team of experienced lawyers who can help resolve your property interest disputes with other co-owners and help you pursue solutions like partition actions. We are here to help.