Idaho Real Estate & Development Law Update: How Much Diligence is Due?

Legal Alert

All buyers of real estate know they need to do their homework. That process is sometimes called “due diligence.” But how much diligence is due? The recent decision of the Idaho Supreme Court in Tiller White, LLC v. Canyon Outdoor Media, LLC, 374 P.3d 580 (Idaho 2016), holds some important lessons. In that case, the Court ultimately concluded that a buyer was not bound by an easement on the property, because the buyer did not learn about the easement until after close of escrow. The Court’s analysis focused on whether the buyer performed an adequate investigation.

To understand that analysis, a little background is needed. A billboard stood on the land being purchased. The seller had originally leased a portion of the land to a sign company for 10 years. Later, the seller sold the sign company an easement that replaced the lease and allowed the billboard to stay permanently. Neither the lease nor the easement was recorded in the public records. At the close of escrow, the buyer obtained a warranty deed and title policy, neither of which mentioned the easement.

Had the buyer relied on the deed and title report alone, the sign company might have won the case. As the Court said: “An unrecorded instrument is valid as between the parties thereto and those who have notice thereof.” Id. at 582 (citation omitted). Despite the clean deed and title report, it was plain for all to see that a sign company’s billboard stood on the land. The buyer’s knowledge of that obvious fact required the buyer to investigate further.

The Court briefly summarized the relevant law as follows:

[A]n unrecorded interest in land is void against subsequent purchasers who acquire title in good faith and for valuable consideration. “The words ‘good faith’ [refer to the absence of] . . . actual or constructive knowledge of [a] prior interest or defect in title.” “One who purchases . . . with notice of inconsistent claims does not take in good faith, and one who fails to investigate [an] open and obvious inconsistent claim cannot take in good faith.” Good faith requires “a reasonable investigation of the property.”

Id. (citations and alterations omitted).

In this case, the buyer investigated further. The buyer asked the seller about the billboard. According to the undisputed testimony of the buyer, the seller gave the buyer a copy of the lease (but not the easement) and said that, although the seller had already received a lump sum of money from the sign company, the buyer would be able to collect more rent after the lease term expired. The seller testified that he told the buyer about a lump-sum payment received from the sign company. But, as to whether he ever actually mentioned the easement, the seller only said that, to the best of his knowledge, he would have kept a file with all the relevant papers in it and he would have given that entire file to the buyer, because the seller had no further use for it. Based on that evidence of the conversation, together with the clean deed and title policy, the Court concluded that the buyer made a reasonable investigation and thus purchased in good faith. Therefore, the sign company’s easement was void against the buyer.

In its arguments to the Court, the sign company emphasized that the buyer never called the sign company to ask about the sign. If the buyer had, it argued, he would have quickly and easily learned about the easement. The Court was not persuaded. The test is whether the buyer conducted a reasonable investigation, not whether he did any one specific act. So, the Court declined to insist that buyers always contact the relevant third party. The Court noted that this is similar to the way that the law does not require third parties to always record their interests, even though doing so would quickly and easily avoid disputes like this.

While it is hard to argue with the fairness of the court’s reasoning, a buyer takes a big risk if it relies on later proving it made a reasonable investigation despite never contacting a relevant third party. While the buyer in this case ultimately won the legal argument, it had to pay an attorney to take the case all the way to the Idaho Supreme Court. Was getting rid of the billboard worth the time and expense?

Most buyers will want more certainty on the front end. This buyer could have made his offer contingent on getting something in writing from the sign company verifying the status of its lease. Such writings are often called “estoppel certificates,” and they are a great way to flush out problems like this before the purchase. If the buyer had asked the sign company for an estoppel certificate regarding the lease, the buyer would have learned that the lease was replaced by the easement.

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