Court Opinion

ID: 9692512
Source: CourtListenerOpinion
Date Created: 2023-08-25 15:56:09.341556+00
Date Added: 2024-06-11T18:19:35.011146
License: Public Domain

STEIN, J.,
concurring in part and dissenting in part.
The Court has determined that as between contract' purchasers of property who make non-obligatory payments under their contract, and construction lenders with knowledge of that contract, *516the recorded lien of the construction lenders is superior and has priority over a vendee’s common law lien for those non-obligatory payments. The Court concludes that the underlying purpose of New Jersey’s Recording Statutes, N.J.S.A. 46:21-1 and 46:22-1, requires that result. I disagree with today’s ruling, pursuant to which contract purchasers who make non-obligatory payments to their builder subsequent to the builder’s obtaining a construction loan secured by a recorded mortgage have a lien inferior to that of the mortgagee even if the mortgagee had knowledge of the contract.
I concur with the balance of the Court’s holding to the effect that a Vendee’s lien generally is superior to that of a mortgagee with notice of the vendee’s interest, and that today’s holding should be prospective — thereby entitling the Coxes to recoup the monies they have expended. I believe, however, that the Court has unduly emphasized the role of New Jersey’s recording statutes in this case; has diminished the significance of common-law equitable principles; and has overlooked the significance of generally accepted real estate practices, including the routine and standard practice of obtaining a subordination of the vendee’s lien in situations where third parties, with notice of the vendee’s prior claim, become the vendor’s buyers or creditors. I therefore dissent from the remainder of the Court’s holding.
I
The facts of this case are unique. Nevertheless, the basic principles are well settled and uniformly accepted. The doctrine of equitable conversion is a fundamental tenet of property law. See 3 American Law of Property §§ 11.22-.40 (A. James Casner, ed.1952) (observing that “from the viewpoint of a [subsequent] transferee who has knowledge or notice of the [prior] contract [between the vendor and the vendee], the vendor holds a naked legal title as security for himself and as trustee for the contract vendee”). Likewise, the superiority of a vendee’s lien over a subsequent creditor with notice of the vendee’s claim is undisput*517ed. See, e.g., W.R. Habeeb, Right of Vendee under Executory Land Contract to Lien for Amount Paid on Purchase Price, 33 AL.R.2d 1384 (1954). The intertwining of the doctrines of equitable conversion and vendees’ liens with the everyday practices of construction lenders and developers provides the jurisprudential backdrop against which this appeal should be decided.
A
Under the doctrine of equitable conversion, at the moment of signing a specifically enforceable contract between a purchaser and a seller of real property — because property is unique and monetary damages are therefore presumed not to compensate fully an injured party — the purchaser’s interest in the contract is converted into real estate and the seller’s interest into personal property. See, e.g., Thompson on Real Property, §§ 4447-4448 (1963). As such, the purchaser is regarded in equity as the owner of the property, as well as the debtor for the purchase money, and the seller of the property is viewed as a secured creditor for the purchase money. Id. at § 4447. Thus, in equity, the purchaser has a real interest and the seller a personal interest, and each party holds his interest as a trustee for the other party. Ibid.; People’s Water Co. v. Millville, 95 N.J. Eq. 732, 123 A. 747 (E. & A.1924); American Law of Property, supra, § 11.40. At the time that the executory contract for the sale of real property becomes effective, the seller retains only the bare legal title and the purchaser becomes the equitable owner. Thompson, supra, § 4447.
That conversion of the parties’ interests results from general equity jurisprudence: that equity regards as having been done that which ought to be done and which equity would order done, ie., the conveyance of the title to the purchaser and payment of the price to the seller. C.C. Langdell, A Brief Survey of Equity Jurisdiction at 263 (2d ed.1904). Frequently, the doctrine is invoked to allocate the rights and obligations incident to the real property and to determine the powers of creditors of each party to *518reach the property in payment of claims owing to them. See, e.g., City of Milwaukee v. Greenberg, 163 Wis.2d 28, 471 N.W.2d 33, 36-40 (1991) (discussing various contexts in which vendor is found to be “owner,” under doctrine of equitable conversion, for purposes of allowing creditors to reach property); Cooke v. Firemen’s Ins. Co. of Newark, 119 N.J.Super. 248, 251, 291 A.2d 24 (App.Div. 1972) (holding buyers to be equitable owners of building and thus permitted to purchase fire insurance to protect their interest).
Inextricably entwined with and arising from the doctrine of equitable conversion is the concept of the vendee’s lien, which is “a natural result of the recognition of a trust relationship between the vendor and the vendee, after contract executed, payment of part of the consideration and a default.” Reilly v. Griffith, 141 N.J. Eq. 154, 163, 56 A.2d 502 (Ch.1947). A vendee’s lien is created, through the doctrine of equitable conversion, when a purchaser of real property has advanced part payment of the purchase price to the vendor, who subsequently defaults on the contract. The lien gives the purchaser the right to recoup the value of the benefit he or she bestowed on the seller out of the real property itself, which stands as security for the repayment of purchase money paid.
“The vendee’s lien is of ancient origin and it has been recognized and enforced in this State since at least 1830.” Mihranian v. Padula, 134 N.J.Super. 557, 563, 342 A.2d 523 (App.Div.1975), aff'd o.b., 70 N.J. 252, 359 A.2d 473 (1976) (citing Copper v. Wells, 1 N.J. Eq. 10 (Ch. 1830), in which the court found that where specific performance had become impossible, a purchaser who has paid money for improvements valueless to him but beneficial to owner has in equity a lien on the property). The .lien arises from the interplay among general equity jurisprudence, the doctrine of equitable conversion and the trust relationship that exists between the parties to a contract for the sale of real property. See 77 Am.Jur.2d, Vendor and Purchaser, §§ 512-516; 4 Pomeroy’s Equity Jurisprudence § 1263 (5th ed.1941).
*519The rationale behind the enforcement of a vendee’s lien is primarily equitable:
[W]hen a purchaser has paid his purchase-money, though he has got no conveyance, the vendor becomes a trustee for him of the legal estate, and he is in equity considered the owner of the estate. When, instead of paying the whole of his purchase-money, he pays a part of it, it would seem to follow, as a necessary corollary: that to the extent to which he has paid his purchase-money, to that extent the vendor is a trustee for him; .in other words, that he acquires a lien exactly in the same way as if, upon the payment of part of the purchase-money, the vendor had executed a mortgage to him of the estate to that extent.
[Craft v. Latourette, 62 N.J. Eq. 206, 207, 49 A 711 (Ch.1901)(citing Rose v. Watson, 10 H.L. Cos. 672).]
The overarching goal of the vendee’s lien is to ensure that a vendee may have the opportunity to recoup his or her investment in real property. That a vendee’s lien is superior to liens of other purchasers who have purchased with knowledge of the vendee’s equitable interest is a basic principle of property law. 29 New Jersey Practice, Law of Mortgages § 101, at 374 (Roger A. Cunningham & Saul Tischler) (1975).
B
One recognized authority suggested that all priority disputes can be reduced to disputes between two legal interests, two equitable interests or a combination of the two. 2 Pomeroy’s Equity Jurisprudence §§ 677-734f. If the priority dispute is between a prior equitable interest and a subsequent legal interest, the subsequent legal interest will prevail only if it is acquired for value and without notice of the prior equitable interest. Ibid. That principle is indirectly the source of race-notice recording acts.
The earliest recording statutes in America were enacted when, having traveled to this country seeking new land to settle, colonists began to view land as a commodity and needed a system to protect both existing titles and good faith purchasers against defective titles. 6A Richard R. Powell, Powell on Real Property, ¶ 904[l][b] (1990). The recording acts in effect today have their genesis in those statutes, enacted as early as 1640. Ibid. Following the Revolutionary War, the federal government began to adopt *520requirements for the recording of interests in real property. Ibid. The government’s impetus was the settlement of western areas of the country and the need for “efficient and principled settlement of this new land.” Ibid. Then, as now, the purpose of the recording acts was to protect bona fide purchasers who, without notice of prior liens, made investments in real property. Ibid.; N.J.S.A. 46:22-1. A secondary purpose of recording acts is to provide purchasers with a public record from which prospective purchasers may ascertain the existence of prior claims that may affect their prospective interests. Ibid.
The ultimate purpose of New Jersey’s recording statutes, N.J.S.A. 46:21-1 and 46:22-1 (the Act), is to “permit[ ] purchasers to rely upon the record title and to purchase and hold title to lands within this state with confidence.” Palamarg Realty Co. v. Rehac, 80 N.J. 446, 453, 404 A.2d 21 (1979) (citing Jones, The New Jersey Recording Act-A Study of its Policy, 12 Rutgers L.Rev. 328, 329-30 (1957)). Necessarily, the Act thus provides a public record within which prospective purchasers may search for any prior claims on a specific property.
Pursuant to the Act, New Jersey is a race-notice jurisdiction. Palamarg, supra, 80 N.J. at 454, 404 A.2d 21. Since 1727, race-notice statutes have been interpreted not to allow subsequent purchasers with notice of the prior interest to prevail over the prior interests. Blades v. Blades, 1 Eq. Cos. Abr. 358, pi. 12, 21 Eng. Rep. 1100 (Ch. 1727). Likewise, this Court has interpreted New Jersey’s Act to mean “that if a common grantor sells the same land to two persons, the first to record — even though he may have been the second to purchase — will prevail, but only so long as he had no actual notice of the earlier sale.” Palamarg, supra, 80 N.J. at 454, 404 A.2d 21.
Recording statutes, generally, do not resolve priority issues in cases in which those statutes do not apply. Thus, New Jersey’s Act, N.J.S.A. 46:22-1, does not assist in resolving the issue before the Court because it does not apply to the facts of this case. Where, as here, the recording statute does not apply, the issue of *521priority must be decided in accordance with common law legal and equitable principles. 6A Powell, supra, ¶ 905[3][c].
C
One other relevant facet of real-estate law is that of subordination agreements. That mortgagees may agree to determine their relative priorities in the mortgaged property is well established. See Lovett v. Demarest, 5 N.J. Eq. 113 (Ch. 1845). Subordination agreements are a means of establishing and altering the priorities between mortgagees. The validity, generally, of subordination agreements has been accepted in New Jersey since at least 1845. Ibid.
Subordination agreements are commonplace in both residential and commercial real-estate practice. They can provide for automatic subordination of a prior lien to the contemplated construction loan mortgage. Form subordination agreements are readily available to parties involved in real-estate transactions.
“Modern real estate development practice often requires extensive use of subordination ... agreements.” Cunningham and Tischler, supra, § 115 at 535. Cunningham and Tischler posit that “use of a subordination agreement is appropriate whenever a landowner seeks a new loan on the security of land already encumbered by a mortgage or some other interest less than a fee simple” and the new lender desires to hold a first mortgage in the property. Ibid.
II
The majority correctly applies established principles of real estate law when it determines that the Coxes’ lien for $12,000, the amount of its initial deposit, is superior to Roebling’s recorded mortgage. Ante at 522, 753 A.2d at 1131. I depart from the Court’s reasoning, however, on the narrow issue of the priority of the Coxes’ lien for their additional payments of $71,225.53 to RKA, which were made subsequent to the recording of Roebling’s *522mortgage. In my view, the purposes of New Jersey’s recording statute would not be undermined, and the public policy underlying that statute would be better served, if the Coxes’ lien were held superior even for non-obligatory payments as between them and a mortgagee with actual notice of the vendee’s equitable interest.
The majority observes that “[s]ome jurisdictions have held that the vendee may recover his or her deposit monies whenever ‘the subsequent lender knows that a contract has been executed, whether or not it is aware of the terms of the contract, the vendee’s identity, or the precise amount of any down payment made.’ ” Ante at 504, 758 A.2d at 1121 (citations omitted). The Court then notes that “it is possible to argue that a vendee should recover all payments, even those made voluntarily in addition to the deposit, so long as the lender has knowledge of the underlying contract.” Ibid. The Court declines, however, to follow that reasoning. Instead, the Court chooses to enhance the status of the recording statutes, applying them in a context in which a mortgagee has actual notice and an opportunity, through subordination, easily to avoid any potential priority problem. The Court’s approach is inconsistent with the overarching goal of the vendee’s lien — the protection of vendees.
A
Although no case law addresses the precise issue before the Court today, the vast majority of eases hold that a vendee has an equitable lien for the reimbursement of money advanced under the contract and make no distinction between obligatory and voluntary advances.
In the preeminent case addressing the priority of payments made under a contract to purchase real property, Jaeger v. Hardy, 48 Ohio St. 335, 27 N.E. 863, 864 (1891), the Ohio Supreme Court held that “[a] mortgage executed by the vendor, on the premises, after the purchaser is put in possession [thereby giving notice to the subsequent mortgagee of the vendee’s interest], is subordinate *523to his prior equity.” The Jaeger court noted that a purchaser need not examine the records for subsequent mortgages “nor is the record constructive notice to him.” Ibid, (emphasis added). The court held that “[u]ntil actual notice of the incumbrance, he may safely continue to make payments of the purchase money to his vendor in pursuance to the contract.” Ibid, (emphasis added). Thus, under Ohio’s rule, until a vendee has actual notice of a subsequent mortgage, any payments made on the sales contract constitute an equitable lien that is superior to the mortgage. See also Wayne Building & Loan Co. v. Yarborough, 11 Ohio St.2d 195, 228 N.E.2d 841, 848 (1967) (observing that “[wjhere the vendee continues to pay out purchase money under his contract to purchase real estate without actual notice of a recorded mortgage, which is held by a mortgagee who took with notice of the vendee’s rights under his contract, the vendee has ... been held entitled to priority as against such mortgagee, for the amounts he has actually paid before such actual notice”). Cf. Myers v. Parsley, 1986 WL 3279, *1 (Ohio App.1986) (noting that “if the purchaser has actual notice of a lien on the vendor’s interest, and continues to make payment to the vendor, he gives up his priority, and subjects his interest to attachment up to the amount of such payments”).
Other jurisdictions likewise have held that monies advanced under a contract to buy real property represent a lien superior to that of a subsequent mortgagee who executes a mortgage to the vendor with knowledge of the preexisting interest. See generally National Indem. Co. v. Banks, 376 F.2d 533, 534 (5th Cir.1967) (holding that “a vendee upon default by the vendor has an equitable lien on the land for the reimbursement of money advanced upon it”); Poole v. Atlanta Joint Stock Land Bank, 189 Ga. 59, 5 S.E.2d 368, 371 (1939) (same); Shirley v. Shirley, 1845 WL 2932, *3 (Ind.1845) (finding vendee’s lien superior to mortgagee and explaining that “[t]he lien is to secure to the vendee the repayment of his expenditures made in pursuance of the contract”); Larson v. Metcalf, 201 Iowa 1208, 207 N.W. 382, 385 (1926) (holding vendee’s lien superior and noting that “[a] vendee *524has a lien on land purchased by him for the purchase-money, or any part of it, paid by him, if the vendor refuses to convey, and this lien attaches to the land in the hands of a subsequent purchaser with notice”); Lowe v. Maynard, 115 S.W. 214, 215 (Ky.1909) (observing that “vendee under an executory contract for the sale and purchase of real property has an equitable lien or estate in the amount paid of the purchase price if the contract fails”); Clough v. Clough, 42 Ky. 64, 1842 WL 3271, *2 (1842) (finding subsequent purchaser had actual notice of vendee’s interest in land and that, therefore, vendee’s lien was superior); Gribble v. Stearman & Kaplan, Inc., 249 Md. 289, 239 A.2d 573, 577 (1968) (same); Palmer v. Crews Lumber Co., 510 P.2d 269, 274 (Okla.1973) (recognizing “that a vendee is entitled, in equity, to a lien on land which is the subject of the sales contract, to the extent of the payments made on the purchase price”); South Carolina Federal Savings Bank v. San-A-Bel Corp., 307 S.C. 76, 413 S.E.2d 852, 854 (1992) (recognizing that “the purchaser under an executory contract for the purchase and sale of real property has an equitable lien on the property in the amount paid on the purchase price”).
Because no case law exists addressing the precise issue before the Court, an analogy to a situation in which a mortgagee enters into a future advance mortgage is informative and appropriate. See ante at 503, 753 A.2d at 1121.
Future advance mortgages typically provide that “the property encumbered by the mortgage stands as security not only for the funds advanced at the time the mortgage is executed and delivered, but also for any obligations incurred after the initial advance.” James B. Hughes, Future Advance Mortgages: Preserving the Benefits and Burdens of the Bargain, 29 Wake Forest L.Rev. 1101, 1102 (1994). Construction loans are a form of future advance mortgage. Id. at 1107. See also Grant S. Nelson & Dale A. Whitman, Rethinking Future Advance Mortgages: A Brief for the Restatement Approach, 44 Duke L.J. 657, 670 (1995). Typically, a construction loan will secure a stated maximum amount and *525will include a clause providing that, after the initial advance, subsequent advances will follow to total a sum equal to or less than the stated amount in the mortgage. Hughes, supra, at 1102. Irrespective of the precise structure of a construction mortgage, the determination of the lien priority of future advance mortgages against a subsequent lien holder turns on whether the advances are obligatory or optional and what constitutes notice to the future advances mortgagee. The optional/obligatory advance doctrine holds that if a mortgagee is contractually obligated to make advance, those advances will be senior to any intervening lien irrespective of notice. Nelson & Whitman, supra 44 Duke L.J. at 669. Thus, in New Jersey, in keeping with the general rule,
[i]t is well settled that a duly recorded advance money mortgage, where the making of the advances is obligatory upon the mortgagee, creates a valid lien for the full amount actually advanced thereunder (up to the stated maximum) as against all subsequent claims, ... even if the advance money mortgagee continues to make advances after he has actual notice of the subsequent claim. Thus the advance money mortgagee has priority over all subsequent judgment creditors, purchasers, and mortgagees even as to advances made after he had actual notice of subsequent judgments against, or conveyances by, the mortgagor.
[Cunningham & Tischler, supra, § 111 at 493 (emphasis added) ].
However, in a situation in which future advances are optional under the terms of the first mortgage and the first mortgagee has notice of an intervening lien or interest, that intervening lien or interest may take priority over the first mortgage. Conversely, where the “first mortgagee has no notice of a subsequent encumbrance, an optional advance mil take priority regardless of whether it was made before the intervening lien attached.” La Cholla Group, Inc. v. Timm, 173 Ariz. 490, 844 P.2d 657, 659 (1992) (emphasis added). See also Bank of Ephraim v. Davis, 559 P.2d 538 (Utah 1977).
When a first mortgagee has notice of the intervening lien, whether the intervening interest takes priority over the first mortgage depends on the type of notice that the first mortgagee receives.
Prior to 1982, that actual notice of a subsequent encumbrance was required before optional advances would lose their lien priori*526ty was settled in New Jersey. See Central Trust Co. v. Continental Iron Works, 51 N.J. Eq. 605, 607, 28 A. 595 (E. & A. 1893) (observing that “mortgages for future advances ... have priority for all advances made before actual notice of subsequent encumbrances”); Weinstein v. Anderson, 102 N.J. Eq. 8, 10, 139 A. 602 (Ch.1927) (noting that the “undoubted rule adopted in this state is ... [that the first] mortgage is superior to the extent of advances made, until actual notice is obtained of the intervention of a later incumbrance”); Durling v. Stillwell, 74 N.J. Eq. 697, 700, 69 A. 978 (Ch.1908) (recognizing that “a mortgage given to secure future advances ... is entitled to priority over subsequent encumbrances for all advances made prior to actual notice of the subsequent encumbrance”); Ward v. Cooke, 17 N.J. Eq. 93 (Ch. 1864) (recognizing general rule and adding that “the notice must be an actual, not a constructive^] notice”).
In 1982, however, the Chancery Division, in Lincoln Federal Savings & Loan Association v. Platt Homes, Inc., 185 N.J.Super. 457, 449 A.2d 553 (1982), chose not to follow prior case law when it determined that the recording statutes required that constructive notice be “on a par with actual notice” when determining the effect of constructive notice of intervening liens of optional advances. Id. at 464-65, 449 A.2d 553. Instead, the Chancery Division found that the public policy of supporting and maintaining the integrity of the recording statute required that an optional advance be viewed as “a new mortgage taken as of the time such advance is made.” Id. at 467, 449 A.2d 553. Thus, the court held that “constructive notice of intervening liens is sufficient to defeat the priority position of a construction mortgagee as to optional future advances.” Id. at 466-67, 449 A.2d 553.
The Lincoln court’s holding is in contrast with the majority of American jurisdictions that “require that the first mortgagee have actual notice of the subsequent lien before [its] claim will be subordinated.” Hughes, supra, 29 Wake Forest L.Rev. at 1115 (emphasis added). Most jurisdictions thus hold that constructive notice such as that derived from recording statutes is insufficient *527to impute knowledge of an intervening lien. See, e.g., Mobley v. Brundidge Banking Co., 347 So.2d 1347, 1349-50 (Ala.1977); Dempsey v. McGowan, 291 Ark. 147, 722 S.W.2d 848, 850 (1987); Idaho First Nat'l Bank v. Wells, 100 Idaho 256, 596 P.2d 429, 433-34 (1979); Freese Leasing v. Union Trust & Sav. Bank, 253 N.W.2d 921, 925 (Iowa 1977); Potwin State Bank v. J.B. Houston & Son Dumber Co., 183 Kan. 475, 327 P.2d 1091 (1958); Axel Newman Heating & Plumbing Co. v. Sauers, 234 Minn. 140, 47 N.W.2d 769, 772 (1951); North v. J.W. McClintock, Inc., 208 Miss. 289, 44 So.2d 412, 414 (1950); Housing Mortgage Corp. v. Allied Constr., Inc., 374 Pa. 312, 97 A.2d 802, 805-06 (1953); McMillen Feed Mills, Inc. v. Mayer, 265 S.C. 500, 220 S.E.2d 221, 225-27 (1975); Bank of Ephraim, supra, 559 P.2d at 541; Colonial Bank v. Marine Bank, 152 Wis.2d 444, 448 N.W.2d 659, 660 (1989); La Cholla Group, supra, 844 P.2d at 659.
Consistent with the majority rule, some states have enacted statutes that redefine “notice” to clarify that only actual written notice delivered to the future advances lender will deprive it of its priority. See Me.Rev.Stat. Ann, tit. 33, § 505(5)(B) (West 1994); Neb.Rev.Stat. § 76-238.01(l)(b) (1990); Ohio Rev.Code Ann. § 5301.232(B) (Baldwin Supp.1993); R.I. Gen. Laws, § 34-25-10(b) (1984); Vt. Stat. Ann. tit. 8, § 1207 (1984); W. Va.Code § 38-l-14(e) (Supp.1994). Several states also stathtorily provide that all future advances, whether optional or obligatory, take the priority of the original mortgage and therefore are superior to any intervening liens. Those statutes also provide for a ‘cutoff notice. Fla. Stat. Ann. § 697.04(l)(b) (West Supp.1995); Me.Rev.Stat. Ann. tit. 33, § 505(5)(A) (West 1994); Mo. Ann. Stat. § 443.055(6) (West 1994); Mont.Code Ann. § 71-1-206(3) (1993); Neb.Rev.Stat. § 76-238.01(l)(a) (1990); Nev.Rev.Stat. Ann. § 106.380(1) (Michie 1994); N.C. Gen.Stat. § 45-72 (1991); Ohio Rev.Code Ann. § 5301.232(C) (Baldwin 1993); Or.Rev.Stat. § 86.155(3) (1988); R.I. Gen. Laws, § 34-25-11 (1984); Tenn.Code Ann. §§ 47-28-105 to -110 (1988); Va.Code Ann. § 55-58.2 (Michie Supp.1994). A cutoff notice is “a notice issued ... to the future advances lender *528that freezes advances at their current level.” Nelson & Whitman, supra 44 Duke L.J. at 686.
The Restatement (Third) of Property (Mortgages) (1996) (Restatement) also adopts the position that “subsequent advances made under a future advance mortgage should have the same priority as the original advance thereunder, but only until the first mortgagee receives a so-called ‘cut-off notice from the mortgagor.” Hughes, supra 29 Wake Forest L.Rev. at 1120 (citing Restatement § 2.3 cmt. b). (Presumably, providing such a notice would be a condition imposed by the subsequent lienor). The Restatement does not distinguish between obligatory and optional advances made by the first mortgagee. Restatement § 2.3 cmt. a. The different priority accorded optional and obligatory payments has been criticized severely. See, e.g., 4 Pomeroy’s Equity Jurisprudence, supra, § 1199; 2 Grant Gilmore, Security Interests in Personal Properties, § 35.4, at 930 (1965) (discussing “the conceptually nonsensical distinction between ‘obligatory’ and ‘voluntary’ ” and observing that result of distinction is creation of “a wide area of judicial discretion” that “amounts to an absence of rule”).
The majority places great reliance on Lincoln when it analogizes the facts of the Coxes’ case to those in cases in which mortgagees make future advances on their mortgages. Ante at 503, 753 A.2d at 1121. The majority states that “[vjendees who voluntarily advance payments after notice of an intervening interest must be viewed, like the mortgagee in Lincoln, as having made such payments at their peril.” Ante at 504, 753 A.2d at 1121.
I believe that the majority errs when it relies on the Chancery Division’s Lincoln opinion. The better rule is that of the majority of jurisdictions which hold that constructive notice of a subsequent and intervening lien is insufficient to deprive parties such as the Coxes of priority. The rationale supporting that rule is that the prior mortgagee should not be obliged “to search the records, from day to day, to learn whether his mortgagor has made any further encumbrances, or to ascertain that of which notice must be given him, by the persons interested.” Bank of Ephraim, supra, *529559 P.2d at 541. See also Hughes, supra at 1127 (observing that “there appears to be no adequate reason for a court ... to afford [a subsequent mortgagee] priority over the first mortgagee” where that subsequent mortgagee is given notice of a mortgage containing a future advances clause).
Moreover, to hold as the majority does imperils the expectations and intentions of construction lenders, thereby “imped[ing] the construction of improvements on ... land and the commencement of other business ventures [that] in the long run diminishes the net wealth of the community.” Nelson & Whitman, supra, 44 Duke L.J. at 667, 674, 679 (observing that “construction lenders fully expeet[ ] and intend[ ] all advances to have the priority of the original mortgage” and noting that under the minority rule the “prior mortgagee may safely make optional advances only if it obtains a title examination before each advance”). The Re statement places the burden on a second mortgagee to take affirmative steps to ensure that the first mortgagee is aware of the second mortgagee’s position by requiring that a cutoff letter be issued to the first mortgagee before its priority can be affected. Restatement § 2.3. A cutoff letter is analogous to the subordination of a prior lien. Just as the actual delivery and acceptance of a cutoff letter protects a second mortgagee’s priority, so too does subordination. As noted, Roebling easily could have protected its lien merely by obtaining a subordination of the Coxes’ lien.
Consistent with the generally accepted principles of equitable conversion, the priority of vendees’ liens and the optional/obligatory doctrine in the area of future advance mortgages, the Coxes’ payments to RKA of over seventy-five thousand dollars, made with no notice of but subsequent to the recording of Roebling’s mortgage, should be superior to that mortgage, and that the payments were optional and not mandated by the contract is of no moment.
B
The purpose of the recording statutes is to “permit[ ] purchasers to rely upon the record title and to purchase and hold title to *530lands within this state with confidence.” Palamarg, supra, 80 N.J. at 453, 404 A.2d 21 (quoting Jones, supra, 12 Rutgers L.Rev. at 329-30). The recording statutes are intended to protect all purchasers, including those such as the Coxes, but particularly bona fide purchasers. N.J.S.A. 46:22-1 (stating that instruments or deeds that are not recorded are “void and of no effect against ... subsequent bona fide purchasers and mortgagees ... not having notice thereof, whose deed shall have been first duly recorded”) (emphasis added). However, situations arise that fall outside the purview of the recording statutes. On the facts of this case, because Roebling had actual notice of the Coxes’ interest, Roebling is not a bona fide purchaser; therefore, the recording statutes have, at most, a minimal bearing on the proper resolution of this case. Because the recording statutes are intended primarily to address priority issues among purchasers who have no knowledge of prior encumbrances, they should not be invoked to resolve the priority issues in this appeal.
Thus, that Roebling properly recorded its mortgage is not pertinent because the Coxes were not obligated to search for subsequent creditors’ liens. See, e.g., Jaeger v. Hardy, supra, 27 N.E. at 864 (noting that a purchaser “is not bound to examine the records for ... incumbrances, nor is the record constructive notice to him”). Even had the Coxes undertaken a title search prior to making its first payment to RKA, no encumbrances on the property would have been revealed. Likewise, Roebling’s title search revealed no encumbrances on the property because the Coxes’ interest was not recorded, and was not required to be recorded. Accordingly, common-law legal and equitable principles must be invoked to resolve the priority dispute at issue. See 6A Powell, supra, ¶ 905[3]. In my view, the equities run in favor of requiring a mortgagee to ensure that known and outstanding liens on the to-be-mortgaged property are subordinated if that mortgagee seeks the superior lien on the property.
Among real-estate professionals, it is the practice to require subordination “whenever a landowner seeks a new loan on the *531security of land already encumbered by a mortgage.” Cunningham and Tischler, supra, § 115 at 535. Although requiring subordination clauses in contracts and mortgages imposes an additional burden on mortgagees, that burden is minimal and is already an established practice among professional in real-estate transactions. Ibid, (observing that majority of professionals involved in real estate transactions already have embraced the practice of subordination of liens). In practice, most banks would be unwilling to enter into a construction loan like the one at issue here unless the contract purchaser consented to the mortgage and agreed to subordinate the vendee’s lien. See Arundel Federal Sav. & Loan Ass’n v. Lawrence, 65 Md.App. 158, 499 A.2d 1298, 1303 (1985) (finding clause in sales contract equivalent to subordination clause and observing that loan officer from bank stated “that if [subordination] language is not in the contract of sale, he would have the buyer sign a separate ‘consent to mortgage’ form”).
By comparison, to require vendees such as the Coxes to undertake a title search every time they wish to make an optional payment pursuant to the contract, which is effectively what the majority opinion holds, imposes an enormous burden. See Bank of Ephraim, supra, 559 P.2d at 541 (recognizing burden involved in requiring first mortgagee to search records “from day to day” to learn of future encumbrances); La Cholla Group, supra, 844 P.2d at 659 (same).
Instances where vendees make additional payments for additional work not contemplated by the contract are not uncommon. Purchasers of undeveloped property on which construction is contracted for frequently will request changes in the construction as it progresses. Those changes generally are outside the contract and unknown to the mortgagee. The majority’s holding requires, in effect, that payment by a buyer outside the contract for changes or “extras” requires a title search to be conducted if the priority of the vendee’s lien is to be preserved. Basie principles of equity mandate that the burden of subordination and title *532searches be placed on that party best-equipped for the task — the mortgagee.
Ill
I concur in the Court’s determination that its new rule of law should apply prospectively. However, because I believe that the equities run in favor of a holding that requires banks to bear the burden of ensuring that their loans are superior to other outstanding encumbrances on real property, I dissent from that part of the majority’s opinion that holds otherwise.
For affirmance — Chief Justice PORITZ and Justices O’HERN, GARIBALDI, COLEMAN and VERNIERO — 5.
Concurring in part and dissenting in part — Justice STEIN — 1.