## Facts

- Gates Rubber Company was a long-term commercial tenant on industrial property in the City of Commerce, California, under a triple-net lease running from 1964 to 1983 with extension options.
- At the start of the tenancy, Gates and the then-owner also executed a separate written option agreement giving Gates specified opportunities to purchase the property; the option was never recorded and was not referenced in any recorded instrument.
- A short-form lease memorandum was recorded; it described basic lease terms and stated the long-form lease was the sole agreement, but it did not mention any purchase option.
- Gates occupied the premises openly and exclusively and operated its business there in a manner consistent with a commercial tenant’s leasehold.
- In 1969, Charles Ulman acquired the property through a chain of title that contained no reference to the option agreement, and there was no evidence he had actual knowledge of it.
- In 1983, Gates attempted to exercise the option to purchase; Ulman’s estate/trustees refused to convey, asserting lack of notice of any option.
- Gates sued for specific performance, declaratory relief, and damages; the trial court ruled for the Ulmans, and Gates appealed.

## Issues

1. Whether Gates’ open and exclusive possession imposed on a purchaser a duty to inquire into unrecorded tenant rights, including an unrecorded option to purchase.
2. Whether Gates’ occupancy was inconsistent with record title (including its recorded leasehold interest) so as to create inquiry or constructive notice of the option.
3. Whether equitable defenses, including unclean hands, supported denial of specific performance.
4. Whether Gates was estopped from enforcing the option against successors because it failed to record the option.

## Decision

- The Court of Appeal affirmed judgment for the Ulmans and denied Gates specific performance, declaratory relief, and damages based on the option.
- Gates’ possession was consistent with its recorded leasehold and therefore did not, as a matter of law, put Ulman on inquiry notice of an unrecorded purchase option.
- Because Ulman lacked actual or constructive notice, he qualified as a bona fide purchaser for value without notice, taking title free of the unrecorded option.
- The court upheld denial of equitable relief, concluding the trial court could properly find Gates’ failure to record (and the record’s suggestion the lease was the complete agreement) supported equitable defenses such as unclean hands and estoppel.

## Legal Principles

- A tenant’s possession gives inquiry notice to a purchaser only when the possession is open, notorious, exclusive, and inconsistent with record title.
- When a tenant’s possession is consistent with recorded instruments establishing the tenancy, a purchaser has no duty to investigate possible additional unrecorded tenant rights.
- An unrecorded interest that is neither recorded nor tied to a recorded instrument generally cannot be enforced against a later bona fide purchaser without notice.
- Specific performance is discretionary; equitable defenses may bar enforcement where the claimant’s conduct, including maintaining a secret unrecorded interest while the record suggests completeness, makes enforcement inequitable.

## Conclusion

The court held that long-term, visible occupancy by a commercial tenant under a recorded lease does not create inquiry notice of a separate unrecorded purchase option; absent actual or constructive notice, a bona fide purchaser takes free of that option, and equitable relief may be denied where the option holder failed to protect its interest through recording.


Gates Rubber Co. v. Ulman, 214 Cal. App. 3d 356 (Cal. Ct. App. 1989)