In highly competitive leasing situation there is a possibility that Company A and Company B each acquires a lease from the same mineral owner for the same piece of ground. In that instance, whose lease is good? Which lease will survive a legal battle?
We record leases to put the world on notice that we (Lessee) have a lease, a binding agreement with the mineral owner (Lessor). After we record the lease, any lease from that Lessor on the same ground is going to be subordinate to ours. Simple enough result but what’s the legal reasoning?
In order to have standing to protect our lease, we must have been a bona fide innocent purchaser for value (except for in Louisiana, which we will cover later). If we knew (or were on constructive notice) of another extant lease, we would not be innocent and would lose our standing as an innocent purchaser.
There are three kinds of notice.
Constructive notice occurs when the lease is recorded in the proper county records. The entire world is deemed to know about the lease immediately upon its recording, even if one lives on the other side of the world or on the moon.
Then there is actual notice which occurs when someone actually sees the document or is told by a reliable source that there is an existing lease on the property.
The third kind is what most refer to as inquiry notice which means that you have information indicating that a lease probably exists which imposes on you a duty to inquire further. A reasonable inquiry would have or could have allowed you to confirm the existing lease, therefore, you are deemed to have known of it.
So far, what does this tell us? That the best way to protect our lease is to record immediately. Certainly there are times when we don’t want to record immediately but just understand that not recording has its risks.
Next time we will talk about the three kinds of notice statutes: Race, race-notice and notice.