REAL PROPERTY: Deeds of Trust Have Priority Over Later Recorded Use Restrictions

In a July 2016 real property opinion, the Missouri Court of Appeals addressed one of the many issues associated with non-judicial foreclosures—i.e. does the foreclosure of a deed of trust extinguish a use restriction that was recorded after the recording of the deed of trust. See Gray v. Shepard, Missouri Court of Appeals, Southern District, Case No. SD33458.

In Gray, the property owner acquired the property from a bank. The bank had acquired the property pursuant to the non-judicial foreclosure of a deed of trust. After acquiring the property from the bank, the property owner then began converting a garage on the property into a residence. The owner’s neighbor sued to stop the construction claiming that a restrictive covenant – that was recorded after the recording of the bank’s deed of trust – prohibited the owner’s construction project. On appeal, the Missouri Court of Appeals ruled that the bank’s foreclosure of the bank’s deed of trust extinguished the use restriction because the restriction was recorded after the deed of trust. Accordingly, after the foreclosure, the bank held title to the property as title existed on the date the bank’s deed of trust was recorded and that was the title that the bank conveyed to the property owner. The Court of Appeals was not persuaded by the neighbor’s argument that the use restriction was not the kind of encumbrance that can be extinguished. The Court of Appeals noted that there is an exception to the general rule if a grantor such as the bank conveys less than its full interest in the property and the conveying instrument shows the grantor’s intent to convey less than the grantor’s full interest—however the facts did not support the neighbor’s attempt to use this exception.

Through its Kansas City and St. Louis offices, Martin Leigh PC keeps current on recent legal developments in banking, real estate and business. As a part of its smaller, faster and smarter law practice, Martin Leigh PC publishes updates like this one to keep industry leaders informed of the current legal environment.