Unrecorded Leases Not Automatically Voided by Indiana's Recording Statute

by Wooden & McLaughlin LLP
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Indiana statute provides that leases for a period exceeding three years must be recorded within 45 days of execution, lest they be deemed void as against any subsequent purchaser, lessee, or mortgagee “who acquires the real estate in good faith and for valuable consideration.” See Ind. Code § 32-31-2-2. Given a recent decision from the Indiana Court of Appeals, however, new or prospective real estate owners should be cautioned against concluding that such unrecorded leases can automatically be voided as a matter of law.

Commercial Coin Laundry v. Park P, LLC, 934 N.E. 2d 142 (Ind. Ct. App. 2010) involved a dispute between the new owner of an apartment complex and the pre-existing lessee operator of on-site laundry facilities. As you might suspect, the lessee’s ten-year lease was unrecorded. After negotiations for an amended lease agreement stalled, the new owner filed a lawsuit in which it requested that the unrecorded lease be declared void as a matter of law. The trial court concluded that the plain language of the statute justified the owner’s request, and the lease was declared void in an order of summary judgment.

The lessee appealed and argued that the statue only operated to protect bona fide purchasers or, in other words, purchasers without notice of the rights of pre-existing lessees. The Court of Appeals agreed with the lessee’s suggested proposition that the statute does not automatically void unrecorded leases, and continued its analysis by discussing how it is that a purchaser of property might be charged with knowledge of a pre-existing lease. The Court discussed that such knowledge obviously arises constructively where a properly recorded lease appears in the chain of title. Because the lease was not recorded, the Court focused on whether the new owner actually knew, or should have known, of the lease when it purchased the property.

The Court essentially concluded that a new owner of real estate will be charged with actual knowledge of a pre-existing lease if the owner has any knowledge to justify an inquiry that would reveal the lease. If the new owner should inquire but does not, the owner is charged with all facts that would have been revealed through reasonable inquiry. Perhaps most importantly, the Court referenced a statement from the Indiana Supreme Court that “one who fails to examine land which he is about to purchase, and to inquire as to the rights of one in possession, is not acting in good faith and will not be treated as a bona fide purchaser.” See Mishawaka, St. Joseph Loan & Trust Co. v. Neu, 209 Ind. 433 (1935).

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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