Bona Fide Purchasers

A bona fide purchaser is a party who has acquired apparent legal title to property in good faith, for reasonably equivalent value and without notice of any outstanding claim in or interest to that property.[1] Whether a party is a bona fide purchaser is fact-dependent and oftentimes hinges on whether the party had requisite notice of the outstanding claim.[2]In Texas, notice can come in three forms: actual notice, constructive notice or inquiry notice.[3] An instrument properly filed for record imparts constructive notice on third parties.[4] However, a purchaser is charged with notice of the contents of any instrument which forms an essential link in that person’s chain of title, whether recorded or not.[5]It is crucial that parties to real property contracts ensure conveyances and interests in real property are promptly recorded, most importantly to ensure that third parties with competing claims over the property do not have the advantage of bona fide purchaser status. Texas law affords substantial protections to bona fide purchasers, but these protections are cut off when third parties are put on constructive notice by a recorded instrument in the chain of title. The rule does not just apply to conveyances; covenants running with the land, such as those typically found in joint development agreements, area of mutual interest agreements, and other similar agreements, should be recorded to ensure that the party that succeeds to the ownership of the underlying properties cannot claim bona fide purchaser status.[6] In Texas, the common law bona fide purchaser doctrine is codified in Texas Recording Act, found in Section 13.001 of the Texas Property Code. The Texas Recording Act provides that an unrecorded conveyance or an interest in real property is void as to a subsequent purchaser or creditor without notice.[7] This means that in Texas, a bona fide purchaser will prevail over the holder of an unrecorded conveyance or an interest in real property. Consider the following example:Fraudulent Oil leases its interest in the Eagle Ford Shale to Sloppy Oil on January 1.Sloppy Oil waits to record the lease, filing it on March 30.In the interim, Fraudulent Oil leases its interest in the Eagle Ford Shale again, this time to Innocent Oil on February 1. Innocent Oil has no notice of the earlier lease and pays fair market value for its lease.Innocent Oil records the lease on April 1.So who wins under Texas law? Here, as a bona fide purchaser, Innocent Oil will prevail over Sloppy Oil and take the lease, even though Sloppy Oil signed and recorded its lease first. Of course, Sloppy Oil could have easily prevented this situation from occurring. If Sloppy Oil would have promptly recorded its lease before February 1 (that is, before Innocent Oil signed its lease), Sloppy Oil would prevail over Innocent Oil because Innocent Oil had constructive notice of the earlier lease. In that event, Innocent Oil would no longer qualify as a bona fide purchaser.  Public records remain one of the easiest ways to provide constructive notice to third parties of corresponding interests in real property. Under Texas law, parties should take great care to promptly record instruments properly evidencing all conveyances, covenants running with the land and other interests in real property, or else risk losing their claim to a bona fide purchaser. [1]Madison v. Gordon, 39 S.W.3d 604, 606 (Tex. 2001) (per curiam).[2]Id. at 606–07.[3]Hexter v. Pratt, 10 S.W.2d 692, 693 (Tex. Comm’n App. 1928, judgm’t affirmed).[4]Id. at 694.[5]Westland Oil Dev. Corp. v. Gulf Oil Corp., 637 S.W.2d 903, 908 (Tex. 1982).[6]See, e.g., id. at 908­­–11.[7] Tex. Prop. Code Ann. §13.001(a)  (West 2010). Conrad Hester & Kelli SimsContributions by Summer Associate Alexander BohnThompson & Knight LLP