Cohen v. Thomas & Son Transfer Line, Inc.
196 Colo. 386, 586 P.2d 39 (1978)
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Rule of Law:
A purchaser of real property who has notice of a tenant's possession has an affirmative duty to inquire directly of the tenant regarding the full extent of their rights, and the purchaser takes title subject to all rights that a reasonable inquiry would have revealed.
Facts:
- In 1968, the property owners (lessors) leased 10 lots to Thomas & Son Transfer Line, Inc. (lessee) for a five-year term.
- The unrecorded lease contained a typewritten clause giving the lessee a right of first refusal to purchase the property.
- On May 1, 1973, the original lease term expired, but the lessee remained in exclusive possession of the property, which it used as a truck terminal, and continued to pay rent.
- In November 1973, the lessee and lessors agreed to a rent increase from $400 to $550 per month.
- Prior to purchasing the property, the Cohens became aware of the lessee's tenancy and possession.
- The Cohens inquired with the lessors, who told them the written lease had expired and the lessee was merely a month-to-month tenant.
- The Cohens did not ask to see the expired lease and made no inquiry directly with the lessee concerning its rights.
- On July 26, 1974, the lessors sold the property to the Cohens without offering it to the lessee first.
Procedural Posture:
- Thomas & Son Transfer Line, Inc. sued the Cohens in district court (trial court) seeking specific performance of its right of first refusal.
- The district court ruled against the lessee, holding that the right of first refusal was not part of the renewed tenancy.
- The lessee, as appellant, appealed to the Colorado Court of Appeals.
- The Court of Appeals (intermediate appellate court) reversed the district court's decision, holding that the renewed lease included the right of first refusal.
- The Cohens, as petitioners, were granted a writ of certiorari by the Colorado Supreme Court (highest court) to review the decision of the Court of Appeals.
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Issue:
Does a purchaser of real property, who has notice that the property is in the possession of a tenant, have a duty to inquire directly of the tenant about their rights, thereby taking the property subject to all rights that a reasonable inquiry would have revealed?
Opinions:
Majority - Mr. Justice Groves
Yes. A purchaser of real property with notice of a tenancy has a duty to conduct a reasonable inquiry into the tenant's rights, which includes inquiring directly with the tenant. The lessee's open and exclusive possession of the property put the Cohens on constructive notice of the tenancy. This notice triggered a duty to inquire reasonably about the lessee's rights. Relying solely on the representations of the lessors (the sellers) was not a reasonable inquiry. A reasonable inquiry would have included questioning the lessee directly, which would have revealed the renewed lease term and the right of first refusal. Because the Cohens failed to make this inquiry, they took title to the property subject to all rights of the lessee that such an inquiry would have uncovered, including the right of first refusal.
Analysis:
This decision solidifies the doctrine of inquiry notice in property law, clarifying that a tenant's possession serves as constructive notice of their rights to a prospective purchaser. It establishes that a purchaser's duty to inquire is not satisfied by merely questioning the seller; they must inquire directly with the party in possession. This strengthens the legal protection for tenants with unrecorded rights, such as options or rights of first refusal, and imposes a higher standard of due diligence on buyers of tenanted property. The ruling thereby shifts risk to the purchaser who fails to investigate fully when signs of a third-party interest exist.
