Under general principles of law, a party acquiring an interest in real property is bound by and takes title subject to any matter recited in the public record. Colorado has a unique and sometimes troublesome exception to that principle. Colorado Revised Statutes (CRS) § 38-35-108 provides as follows:
CRS § 38-35-108. Reference to some other instrument affects only the parties thereto. When a deed or any other instrument in writing affecting title to real property has been recorded and such deed or other instrument contains a recitation of or reference to some other instrument purporting to affect title to said real property, such recitation or reference shall bind only the parties to the instrument and shall not be notice to any other person whatsoever unless the instrument mentioned or referred to in the recital is of record in the county where the real property is situated. Unless the same is so recorded, no person other than the parties to the instrument shall be required to make any inquiry or investigation concerning such recitation or reference.
Pursuant to this statute, when a recorded deed or instrument affecting title to real property contains a recitation of or reference to some other instrument purporting to affect title to that property, the recitation or reference binds only the parties to the instrument. The statute also provides that the recitation or recording is not notice to any other person unless the instrument referred to in the recital is of record in the county where the real property is situated. Further, unless the instrument is recorded, no person other than the parties to the instrument are required to make any inquiry or investigation concerning such recitation or reference.
This statute can be very important when parties to an agreement want to give record notice of the agreement without recording the entire document. For example, the parties to an option-to-purchase or a lease of real property often want to give notice to third parties, who may acquire an interest in such property, of the existence of the option or lease agreement so that such acquiring parties may take title to the property, subject to the agreement. At the same time, the parties also prefer to keep the business terms of their agreement confidential and, therefore, do not want to record the entire agreement. Instead, often they record a "Memorandum" of the agreement to "put the public on notice" of the existence of the agreement, without disclosing its terms. Under CRS § 38-35-108, however, the mere reference to an agreement in the Memorandum is, by its literal terms, ineffective to bind a third party (including a purchaser or lender) that is acquiring an interest in the property. The argument of a party recording a Memorandum would be that the Memorandum provides the third party knowledge of the material terms set forth in the Memorandum so as to constitute an agreement of record with sufficient notice to bind third parties.
One solution that exists for the parties to protect themselves under this statute, without recording the entire comprehensive agreement, is to record a "short form agreement" in which the property owner grants a right to the other party in the property (e.g., an option to purchase to the optionee). The short form agreement should state the length of the term of the agreement and the legal description of the property. It need not include all of the other terms of the agreement, such as the purchase price or payment terms. Those terms can be incorporated by reference to the comprehensive agreement, along with a statement that if there are inconsistencies between the terms of the short form agreement and the comprehensive agreement, the comprehensive agreement will control.
Although the two documents are very similar, the short form agreement is likely a preferable filing because, unlike the Memorandum, it is a binding agreement. Therefore, upon its being recorded, any third party, which thereafter acquires an interest in the property, has notice of the agreement and is put on inquiry notice as to the terms of the agreement and, thus, takes title subject to the agreement of record. On the other hand, pursuant to CRS § 38-35-108, a Memorandum that merely references an agreement is not an agreement itself and will not be notice to anyone acquiring an interest in the affected property; nor will it require a third party to make any inquiry or investigation as to its terms.
As a result, when creating documents of record in Colorado, which reference a separate and more comprehensive agreement not of record, be mindful of this statute and the solution mentioned above to record a document that comprises a short form of agreement between the parties, containing certain material terms of the transaction rather than a simple Memorandum that merely references such other document.