In Schiller v. Scott, 82 N.C.App. 90 (1986), Judge Whichard ably enunciated the North Carolina "race to the courthouse" doctrine established by our recording acts as "No notice, however full or formal, will supply the want of registration of a deed." He also acknowledged that North Carolina courts have recognized that in cases of; "...estoppel, fraud, or actual or constructive knowledge of pending litigation can defeat the priority of valid lien creditors or purchasers for a valuable consideration." Anderson is a rare example of one of those cases where a court chose to apply equitable principles to defeat a want of recording and the Court of Appeals affirmed.
The plaintiff in this action filed his complaint and notice of lis pendens in 2014 seeking to exercise his interest in the property pursuant to a notarized Right of First Refusal Agreement, (ROFR) and to have defendants' recorded Memorandum of Option declared null and void. The pleadings allege that the plaintiff entered into a lease agreement with Christopher David Walker ("Walker") for the subject real estate ("the property") in 2010. The plaintiff and Walker executed a new lease in 2013 that included a notarized right of first refusal to the plaintiff. Subsequently, Curtis T, LLC, through its member and manager Tsiros, entered into an option agreement with Walker ("the Option Agreement" or "Memorandum of Option") to purchase the property which was subsequently recorded.
The trial court found that although the plaintiff and Walker had executed a ROFR with respect to the property in 2013, the document was never recorded. The court also found that Walker gave Tsiros a copy of the plaintiff's lease when the defendants executed the Option Agreement with the ROFR Agreement specifically referenced in the lease and the lease had not expired. The trial court also found that the defendants met with the plaintiff in 2014 who informed them that he intended to exercise his ROFR.
While the trial court also found that the plaintiff only gave formal notice of his intent to exercise the ROFR after became aware of the defendants' Option Agreement, the court found that "it would be unjust and inequitable to enforce the Option Agreement procured by [defendants] so as to deprive Plaintiff of" his right of first refusal, and that defendants, inasmuch as they relied upon equity, failed to comport with the maxim, "he who comes into equity must come with clean hands." The trial court determined that the defendants' conduct in securing the option contract was "overreaching and oppressive [,]" and that plaintiff's right of first refusal took precedence.
However, the trial court also determined that the defendants maintained a claim against Walker for breach of contract and ordered Walker to pay damages to the defendants for breach of contract, payable from the proceeds of the sale of the property. The court ordered Walker to convey the property to the plaintiff by a general warranty deed pursuant to the right of first refusal, with the same terms and conditions, after concluding that defendants had no rights in the property.
The defendants' two arguments challenging the trial court's order of specific performance of the plaintiff's ROFR were unsuccessful with the Court of Appeals. The court, with appropriate citation, held the defendants to a high standard of review requiring a showing of an abuse of discretion on the part of the trial court in awarding equitable relief.
Significantly, the Court of Appeals, citing Smith v. Mitchell, 301 N.C. 58, (1980) (citation and quotation marks omitted) a ROFR is analogous to an option contract, but they "'are technically distinguishable.' Whereas '[a]n option creates in its holder the power to compel sale of land, . . . [a] preemptive provision, on the other hand, creates in its holder only the right to buy land before other parties if the seller decides to convey it.'"The opinion states that:
"...a right of first refusal is enforceable against a subsequent purchaser for value who has "actual or constructive knowledge of the preemptive right." Legacy Vulcan Corp. v. Garren, 222 N.C. App. 445, 449, 731 S.E.2d 223, 226 (2011). Generally, a person ischarged with notice of what appears in the deeds or muniments in his grantor's chain of title, including . . . instruments to which a conveyance refers. . . . Under this rule, the purchaser is charged with notice not only of the existence and legal effects of the instruments, but also of every description, recital, reference, and reservation therein. . . . If the facts disclosed in a deed in the chain of title are sufficient to put the purchaser on inquiry, he will be charged with notice of what a proper inquiry would have disclosed.Id. at 449, 731 S.E.2d at 226-27 (citation and quotation marks omitted). However, "[a]n innocent purchaser takes title free of equities of which he had no actual or constructive notice." Id. at 449, 731 S.E.2d at 227 (citation and quotation marks omitted). Accordingly,
[w]here the defense of "innocent purchaser" is interposed and there has been a bona fide purchase for a valuable consideration, the matter which debases the apparent fee must have been expressly or by reference set out in the muniments of record title or brought to the notice of the purchaser in such a manner as to put him upon inquiry. Id. (citation and quotation marks omitted).
The defendants argued that the failure to record either the lease or the ROFR made their recorded option contract superior irrespective of the actual notice. The opinion cites our recording Act, N.C.G.S. Section 47-18 which makes no mention of rights of first refusal and concludes: "according to the plain language of the statute, a right of first refusal need not be recorded in order to be valid." This conclusion is supported by Smith as the preemptive rights are distinguishable from option contracts which are listed in the recording act.
The Court of Appeals attempts to bolster the analysis as follows:
Furthermore, "[o]ur registration statute does not protect all purchasers, but only innocent purchasers for value." Hill v. Pinelawn Mem'l Park, Inc., 304 N.C. 159, 165, 282 S.E.2d 779, 783 (1981). "While actual notice of another unrecorded conveyance does not preclude the status of innocent purchaser for value, actual notice of pending litigation affecting title to the property does preclude such status." Id. Where a purchaser claims protection under our registration laws, he has the burden of proving by a preponderance of the evidence that he is an innocent purchaser for value, i.e., that he paid valuable consideration and had no actual notice, or constructive notice by reason of lis pendens, of pending litigation affecting title to the property.
The opinion asserts that the attempt to exercise the option did not occur until after the notice of lis pendens was filed, but it must be noted that the option agreement was entered into and recorded before the filing of the notice of lis pendens. As the opinion cites, the North Carolina recordation statute, N.C.G.S. Section 47-18, provides, in pertinent part:
No (i) conveyance of land, or (ii) contract to convey, or (iii) option to convey, or (iv) lease of land for more than three years shall be valid to pass any property interest as against lien creditors or purchasers for a valuable consideration from the donor, bargainer or lesser but from the time of registration thereof in the county where the land lies[.] . . . [I]nstruments registered in the office of the register of deeds shall have priority based on the order of registration as determined by the time of registration[.]
On the other hand, as the lease, of which the ROFR was a part, was for less than three years, it did not have to be recorded. It might have simply been clearer if the opinion had focused more on the fact that the defendants had actual knowledge "that Plaintiff was a tenant in possession who had preemptive rights under the ROFR and that Plaintiff was planning to exercise those rights." That as neither the lease nor the ROFR were required by the recording Act to be recorded to be enforceable, the defendants were estopped by their actual knowledge from claiming superior title.
In affirming the trial court's order of specific enforcement of the plaintiff's ROFR, the court said: "The right of an innocent purchaser for value to take priority over an unrecorded right in real property only applies to those purchasers who acquire title without knowledge, actual or constructive, of another's unrecorded rights." It might have been better had the opinion read: "The right of an innocent purchaser for value to take priority over an unrecorded right in real property that is not required by statute to be recorded to be enforceable only applies to those purchasers who acquire title without knowledge, actual or constructive, of another's unrecorded rights."