Win the Race but Lose the Case?

Michigan Court of Appeals Interprets Race-Notice Statute
By: Gregg A. Nathanson, Esq.

In a recent opinion by the Michigan Court of Appeals applying Michigan’s race‑notice statute, the party that recorded its deed first “won the race” but still lost the case.

Facts

On July 25, 2014, Henry Windemuth conveyed property in Warren, Michigan to Sharon Bilbrey, by quitclaim deed. Bilbrey never recorded the deed and died in 2017. Her husband and 2 children (collectively the “Bilbreys”) continued to occupy the property.

On May 18, 2022, Windemuth signed a purchase agreement to sell the same property. The agreement stated the property was “currently tenanted by renter, or will be at time of closing” and that the tenant “paid zero dollars a month in rent.” It required Windemuth to provide the purchaser with documents confirming the Bilbreys’ status as tenants before closing, but the eventual assignee of the purchaser, John Graham, Inc. (“Graham”), a real estate company, waived that requirement.

Before the closing, Graham’s representatives never met or spoke with the Bilbreys. Graham received a title insurance commitment (and later an owner’s policy) from North American Title Insurance Company.

On June 7, 2022, a warranty deed from Windemuth to Graham was recorded. Graham then sought to evict the Bilbreys. On August 11, 2022, the Bilbreys recorded their 2014 quitclaim deed and claimed superior title. Litigation followed.

The trial court quieted title in favor of the Bilbreys. The court reasoned that Graham was not a bona fide purchaser for value because it knew the property was occupied by the Bilbreys before receiving its deed. Graham appealed.

Michigan’s Race-Notice Statute

Michigan’s race-notice statute (MCL 565.29) determines priority between competing recorded deeds. It provides, in relevant part:

Every conveyance of real estate within the state…. which shall not be recorded as provided in this chapter, shall be void as against any subsequent purchaser in good faith and for a valuable consideration, of the same real estate…., whose conveyance shall be first duly recorded.

Thus, to gain priority over a prior unrecorded interest, a subsequent purchaser must: (1) pay value, (2) record first, and (3) lack actual or constructive notice of a prior unrecorded interest.

Graham bought the property knowing the Bilbreys were in possession. However, Graham relied on Windemuth’s representation that the Bilbreys were merely tenants. Graham had no idea the Bilbreys were holding an unrecorded quitclaim deed when it closed and recorded its warranty deed.

Nonetheless, the Court of Appeals affirmed the trial court’s judgment for the Bilbreys. It held that possession of real property constitutes constructive notice of the possessor’s title. Once Graham knew that the Bilbreys were in possession, it had a duty to determine their interest, including by contacting the Bilbreys directly to inquire about their interest in the property.

Although Graham relied on Windemuth’s representations in the purchase agreement, obtained a ‘clean’ title commitment, and confirmed that no deed to the Bilbreys was of record prior to closing, the Court concluded these steps were insufficient. By failing to contact the Bilbreys, the Court found Graham “took affirmative steps to ensure its ignorance” of their interest and therefore did not qualify as a good faith purchaser.

The Court also noted that Graham’s title insurance policy contained a standard exception for “rights of claims of parties in possession not recorded in public records,” which excluded coverage for the Bilbreys’ unrecorded interest. (As an aside, why is a standard exception on Graham’s title policy evidence of the Bilbreys’ ownership interest?)  Because Graham had constructive notice via the Bilbreys’ possession and failed to make a direct inquiry, the Court held, as a matter of law, that Graham was not a good faith purchaser. Therefore, even though it recorded its deed first, Graham was not entitled to receive the benefits of priority provided by Michigan’s race-notice statute.

Doctrines of Unclean Hands and Laches

The Court also rejected Graham’s arguments based on the equitable doctrines of unclean hands and laches. Under the doctrine of unclean hands, if a party (here the Bilbreys) behaves inequitably or in bad faith, the court will not protect them. The Court found no evidence that the Bilbreys acted inequitably or sought to deceive Graham.

The doctrine of laches focuses on the unfairness of allowing a claim to be brought after an unreasonably long delay which prejudices the other party. The Bilbreys waited over eight years and until after learning that Graham recorded its warranty deed, before they recorded their deed. Graham claimed that this lengthy delay was unreasonable, prejudiced its interests, and therefore, its title should have priority over that of the Bilbreys. The Court found these arguments unpersuasive. The Bilbreys’ delay did not negate the fact that Graham was not a good faith purchaser due to its constructive notice. Therefore, the Court refused to apply the doctrine of laches in favor of Graham.

In sum, although Graham’s recorded its deed first, its constructive notice of the Bilbreys’ interest through their possession of the property precluded Graham from being a good faith purchaser under Michigan’s race-notice statute.

Takeaway

Graham should have met with the Bilbreys and had them sign a well-drafted tenant estoppel certificate. Buyers typically use estoppel certificates to confirm lease terms, such as whether the tenant has the right to extend the lease term, a right of first refusal, or an option to purchase the property. Here, an estoppel certificate could have revealed the Bilbreys’ ownership claim. If the Bilbreys signed an estoppel certificate representing themselves as tenants without disclosing their ownership interest, they probably would have been estopped from later claiming ownership based on the unrecorded quitclaim deed. This step would have allowed Graham to establish its status as a good faith purchaser, thereby winning both the race to record and the case.

For further information, contact Gregg A. Nathanson, Esq., an attorney at the law firm of Couzens Lansky, 39395 W. 12 Mile Road, Suite 200, Farmington Hills, Michigan 48331, 248-489-8600, or gregg.nathanson@couzens.com

The information contained herein does not attempt to give specific legal advice. For advice in particular situations, the services of a competent real estate attorney should be obtained. These materials are the exclusive property of Gregg A. Nathanson, Esq., and no reprint or other use of the information contained herein is permitted without Mr. Nathanson’s express prior written authorization.

©2025 Gregg A. Nathanson, Esq.

Michigan Court of Appeals Upholds Implied Covenant of
Good Faith and Fair Dealing in Land Contract Dispute
By: Gregg A. Nathanson, Esq.

The Michigan Court of Appeals recently upheld the importance of acting in good faith and fair dealing in a case involving a land contract dispute. The Court ruled a seller could not act in bad faith in order to avoid performing under the contact.

What happened?  The buyer and seller had a bona fide dispute as to the land contract balance. The buyer made all installment payments timely. There was an issue as to the interest rate and also whether a portion of the payments should have been made directly to the seller’s mortgage lender. The buyer sued the seller, asking the court to determine the balance due and order specific performance, by requiring the seller to deliver a warranty deed to the buyer upon payoff. The trial court found that it was premature to decide the case since the buyer never tendered a check for what they believed to be the remaining land contract balance. The buyer appealed, and the Michigan Court of Appeals reversed.

The Court of Appeals first addressed, what is land contract. A land contract is an “executory contract in which legal title remains in the seller/vendor until the buyer/vendee performs all of the obligations of the contract while equitable title passes to the buyer/vendee upon proper execution of the contract.” When the buyer/vendee has fully performed, the seller/vendor must convey the property to the vendee by appropriate deed. A land contract is a contract for the sale of land governed by the Michigan statute of frauds and must be in a signed writing, even though the parties are free to mutually waive or modify one or more contract terms.

The Court then turned to analyzing the implied covenant of good faith and fair dealing. The Court found an implied agreement written into every real estate contract that one party will not place an obstacle in the way of the other party’s performance. Here, the seller would not provide a final payoff for the amount owed and said he would not have accepted payment anyway. By taking this position, the seller breached his duty of acting in good faith and dealing fairly with the buyer. The seller’s bad faith placed an obstacle in the way of the buyer’s performance.

The Court then discussed the doctrine of anticipatory repudiation. If, before the time of performance, a party to a contract unequivocally declares their intent not to perform, then the other, innocent party has the option to either sue immediately for breach of contract or wait until the time of performance.  Here, since the seller breached first by declaring he would not accept a check from the buyer for the amount the buyer believed he owed at the end of the land contract term, this excused the buyer’s nonperformance of not tendering payment to the seller. As a result, the buyer was entitled to have the Court issue a declaratory judgment to determine the balance due under the land contract, and order specific performance obligating the seller to provide the buyer with the warranty deed upon receipt of the land contract payoff.

The take away:  There is an implied covenant of good faith and fair dealing in real estate contracts, even if it is not an explicit covenant set forth in the written agreement signed by the parties. Brokers owe their principals – both buyers and sellers – a fiduciary duty of reasonable care and diligence, including acting in their principal’s best interest.  This includes advising the principal to act in good faith and deal fairly with the other side.  It’s not just a good idea, it’s the law.

For further information, contact Gregg A. Nathanson, Esq., an attorney at the law firm of Couzens Lansky, 39395 W. 12 Mile Road, Suite 200, Farmington Hills, Michigan 48331.
248-489-8600 or gregg.nathanson@couzens.com.