Top Five Silliest Real Estate Laws: No. 1: Minnesota’s Torrens Law

These past five weeks, I’ve written about several real estate laws – both Federal and Minnesota – that, in my opinion, do not make sense any longer.  I’ve done this to show that good intentions sometimes produce unintended adverse results.  More importantly, some laws are impeding the recovery of the real estate market.

Now, we close out this series of posts with a set of statutes that I think qualify as the most useless real estate law around:  Minnesota’s Torrens system of land title registration.

Many people whom I talk to who are not from Minnesota – including several attorneys – are surprised to find out that Minnesota has two systems of land title registration:  the abstract system, which most other states follow, and a separate system called the “Torrens” system.  This second system, adopted in 1901 and named after Sir Richard Torrens who created a method of registering ships in 19th century Australia, requires interests in real property to be memorialized on a certificate of title, and interests not so memorialized are not valid.

The purpose of the Torrens system is to create conclusive evidence of interests in real property.  Documents that are submitted for recording are reviewed by the county’s Examiner of Titles, and the Examiner’s office’s approval is required before the document can be recorded with the county’s Registrar of Titles (which, by the way, is an office separate from the County Recorder).  The idea behind this system is to keep stray interest, fraudulent documents, etc. from entering the recording system and creating later title disputes.

However, as I’ve written in a prior post, the Torrens statutes have not brought an end to disputes and litigation; rather, the disputes over Torrens titles are just different in scope from title disputes over abstract property.   Take the case of In Re Collier, 726 N.W 2d  799 (Minn. 2007), in which the Minnesota Supreme Court overturning a lower court decision involving a mortgage erroneously recorded in the abstract records rather than the Torrens records.  Joshua Collier, upon discovering the error, purchased the property from the original owner and quickly registered his interest.  The Minnesota Court of Appeals, citing the longstanding purpose of the Torrens system that one need look no further than the Certificate of Title to determine the interests registered on a particular parcel of property, held that the subsequent foreclosure of the mortgage was invalid as against a subsequent purchaser of the property and that Mr. Collier was a “bona fide purchaser”.  The Supreme Court overturned, holding that a party who had actual knowledge of an interest, regardless of whether the certificate of title showed the interest or not, Collier’s actual knowledge of the mortgage made it impossible for him to be a bona fide purchaser.

At the end of the day, the Minnesota Supreme Court made the right decision, but in the process, it called into question the fundamental purpose of the Torrens system; that is, if the interest is not listed on the certificate of title, it is not valid.  Collier’s significance is that it created an exception to that basic premise and in the process, equalized the Torrens and abstract systems.

A more recent Court of Appeals decision, Imperial Developers, Inc. v. Calhoun Development, LLC, et al, again demonstrated the absurdity of the Torrens system, when the Court held that to be valid, a mortgage must be recorded with the Registrar of Titles and memorialized on the Certificate of Title.  In other words, if the Registrar of Titles errs in including a mortgage on the Certificate (which was the case in Imperial Developers), the holder of that mortgage interest was out of luck.  It remains to be seen whether the Minnesota Supreme Court will again intervene and correct this decision.

In Re Collier and Imperial Developers are just two examples of court decisions which would not have existed if Minnesota had only the abstract system.  These types of cases, along with the requirement that a “proceeding subsequent to registration” must be started after any foreclosure in order to obtain a new Certificate of Title for the new owner, start to make the Torrens system look like a “make work” program for real estate attorneys.  

One final point about the Torrens system that favors its extinction:  it is used in only three of Minnesota’s 67 counties.  Hennepin (where Minneapolis is located), Ramsey (St. Paul) and St. Louis (Duluth) use the system with some frequency, but other counties do not, meaning that without a repeal of the Torrens system, Minnesota will always have two separate recording systems and, hence, more cases such as those mentioned above. 

With Minnesota and its counties in a budget crunch, a repeal of the Torrens system could relieve some of the strain on the judicial system (by not having to deal with cases such as Collier) and loosen up county budgets for more important priorities (since the personnel that comprise the county Torrens offices would no longer be needed). 

The Torrens system was enacted to bring clarity to real estate titles in Minnesota.  Instead, it has traded one set of title disputes for another.  For that reason and the others I’ve mentioned herein, the system has outlived its usefulness and lands at No. 1 on the list of the “Top Five Silliest Real Estate Laws.” 

Now that we’ve come to the end of my “screeds”, if you’re a reader of this blog, what should you do with this information?  Spread the word about these laws to others and contact your elected officials.  As I’ve shown, some of these laws go beyond silliness and are adversely affecting our real estate market and its recovery.  Governments at all levels are seeking solutions to the housing crisis and seem to believe that passing new laws – loan modification and short sale programs, tax credits and the like – are the answer, when in fact it could be the repeal of existing laws that are the key to recovery.