BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2011-2012 Regular Session
SB 284 (Harman)
As Introduced
Hearing Date: March 29, 2011
Fiscal: No
Urgency: No
BCP:rm
SUBJECT
Real Property: Marketable Title
DESCRIPTION
This bill would provide that an option to purchase real property
expires of record six months after the date the instrument that
creates or gives constructive notice of the option is recorded.
BACKGROUND
Recording statutes play an important role in resolving conflicts
as to who may own a piece of property. California, a
"race-notice" jurisdiction, requires conveyances of real
property to be recorded in order to be valid against other
purchasers of the same property from the owner, provided certain
conditions are met. A subsequent purchaser of the same property
for value "wins" if they had no knowledge of the prior transfer,
and they record before the prior purchaser. As a result of that
principle, prospective purchasers must search records to see if
there are any adverse records that may create a cloud on title,
and, upon purchase, must record as soon as possible to preserve
clear title. (Essentially, a cloud on title is a property
interest that prevents a party from receiving a clear title to
the property.)
To address issues relating to obsolete recorded interests, the
California Law Revision Commission (CLRC) recommended enacting
several provisions to address some of the most common
title-clouding interests in California. That recommendation
resulted in the enactment of the Marketable Record Title statute
in 1982, which included a provision that recorded notices of
(more)
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options to purchase real property expire, by operation of law.
Those options give the potential purchaser the ability to
purchase the property during the stated option term, subject to
the conditions of the contract. Under existing law, those
notices expire of record either within: (1) six months after the
option expires according to its own terms; or (2) if there is no
expiration date, six months after the notice of option is
recorded. (Civ. Code Sec. 884.010.) It should be noted that
the statute expires the "record notice" of the option, not the
actual option itself; that record notice is important due to
California being a "race-notice" jurisdiction.
In 2009, the CLRC identified a gap in coverage of the above
statute that could cause an obsolete option to cloud title in
cases where "off-record" information is used to determine the
option's expiration. This bill, sponsored by the California
Land Title Association, would implement the CLRC's
recommendation to clarify that an option whose expiration date
is not ascertainable from the recorded instrument expires of
record six months after recording.
CHANGES TO EXISTING LAW
Existing law provides that if a recorded instrument creates or
gives constructive notice of an option to purchase real
property, the option expires of record if no conveyance,
contract, or other instrument that gives notice of exercise or
extends the option is recorded within the following timeframe:
Six months after the option expires according to its own
terms; or
If the option provides no expiration date, six months
after the date the instrument that creates or gives
constructive notice of the option is recorded.
This bill would revise those timeframes to, instead, expire
those options of record:
Six months after an expiration date that is
ascertainable from the recorded instrument; or
Six months after the recordation of the instrument that
creates or gives notice of the option if: (1) the
expiration date of the option is not ascertainable from the
recorded instrument; or (2) the recorded instrument
indicates that the option provides no expiration date.
This bill would also make a technical change to a related
section.
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COMMENT
1. Stated need for the bill
According to the author:
In most cases, the status of record notice of an option can
be readily determined from the information provided in the
notice itself, without any need to consult off-record
information. However, there are circumstances in which the
status of record notice cannot be determined from the title
records alone.
That is because the status of record notice of an option
depends on the expiration date of the option (if any). That
information might not be included in the record, in which
case off-record information would be required to determine
the status of the record notice.
That would make it difficult or impossible for a title
researcher to determine whether the record notice is
effective, creating a cloud on title that may persist long
after the underlying option has become obsolete. Judicial
proceedings could be required to determine the status of
title.
The author notes that SB 284 would correct this issue by
allowing the statute at issue to "operate entirely on the basis
of information that is ascertainable from the recorded
document."
2. Expiring record notice of options to purchase
The Marketable Record Title statute seeks, among other things,
to limit the cloud on title created by obsolete unexercised
options to purchase. Those options to purchase essentially give
the option holder the right to purchase the property subject to
any deadlines or conditions contained within the option. Upon
the recordation of that option, any future owner would have to
purchase the property subject to that option, unless the record
notice of that option expires (thereby lifting the cloud from
title). The CLRC's original 1982 recommendation noted that
expiring record notice of those options "Ýwould] enhance the
marketability of property . . . by removing the cloud on title
simply by the passage of time without the need for resort to
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judicial proceedings." Absent the expiration of the option,
title may be cleared by obtaining a quitclaim deed from the
option holder (deeding any interest they may have), or by the
purchaser bringing a quiet title action in court (arguably time
consuming and costly).
Existing law addresses the issue of obsolete options clouding
title by providing that record options to purchase expire by
operation of law: (1) six months after the option expires
according to its own terms; or (2) if the option provides no
expiration date, six months after the option is recorded. (See
Comment 3 for a discussion on how the statute expires the record
notice of that option, not the option itself.) This bill, based
on a 2009 CLRC recommendation, would additionally provide that
where the expiration date of the option is not ascertainable
from the recorded instrument, the option expires of record six
months after recordation.
CLRC notes that the proposed change would address a gap in
existing law where off-record information may be required to
determine whether an option has expired. Since the status of a
record notice of option depends on the option's expiration date,
a recorded document that does not contain information about an
expiration date creates potential problems. In that
circumstance, the CLRC notes that off-record information would
be required to determine the status of the record notice and
that it would be "difficult or impossible for a title researcher
to determine whether the record notice is effective, creating a
cloud on title that may persist long after the underlying option
has become obsolete."
By expiring the record notice of those options six months after
recordation of the instrument that creates or gives constructive
notice of the option, this bill would allow the record notice
status of those options to be determined from the public record.
Staff notes that the proposed expiration of those options
appears consistent with the current requirement that options
with no expiration date expire (as a matter of law) six months
after recordation. The proposed change also appears consistent
with the Legislature's codified public policy that "Ýt]he status
and security of real property titles should be determinable to
the extent practicable from an examination of recent records
only."
3. Change would expire record notice, not wipe out option
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California, as a race-notice jurisdiction, requires conveyances
of real property to be recorded in order to be valid against
subsequent bona fide purchasers. The statutes at issue that
provide for the expiration of record notices of option do not
expire or wipe out the option - the statues merely expire the
"record notice" of that option. After the expiration of that
record, a subsequent purchaser could arguably record a
conveyance and receive clear title under California's
race-notice rules. On the other hand, if an option holder does
seek to continue his or her option after its expiration, that
same individual could record a new notice of the option. The key
issue for a prospective purchaser is whether there is record
notice for an option in effect at the time they acquire an
interest in the property - if there is a record notice of
option, the purchaser takes the property subject to the recorded
option.
4. Need for a deferred operative date
CLRC's recommendation included a one year delayed operative date
"Ýi]n order to avoid any unfair surprise to those who have
recorded notice of an option to purchase real property under
existing law . . . ." That delayed operation is necessary so as
to "provide sufficient time for those who have recorded notices
to adjust to the change in the law." Consistent with that
recommendation, the bill should be amended to include a one year
delayed operative date.
Suggested amendment:
On page 3, after line 2, insert:
SEC. 3. This act shall become operative on January 1, 2013.
Support : None Known
Opposition : None Known
HISTORY
Source : California Land Title Association
Related Pending Legislation : None Known
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Prior Legislation : None Known
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