The Defaulting Seller and a Notice of Lis Pendens
By David Allen
After months of searching, you have finally found the house of your dreams, and much to your delight the Seller has accepted your offer of $500,000. You deposit your $15,000 "earnest money" with the escrow company, and an escrow is opened. As part of your "due diligence" you spend $1,000 on inspections, and in anticipation of moving, you pay a moving company a $1,500 non-refundable deposit. The escrow process has proceeded smoothly, until one week prior to the scheduled closing date when you receive an e-mail from the Seller, informing you that he has "changed his mind," and no longer wishes to sell you his property.
The above scenario raises the question of what legal "remedies" are available to a Buyer when a Seller has breached the contract of sale. In such a situation the Buyer has two alternatives. One, is to seek to recover its "damages" from the Seller. In the example here, such damages would include the return of his $15,000 "earnest money" and recovery of his $2,500 "out-of-pocket" costs for the inspections and moving company deposit. Additionally, if the Buyer is able to prove that the "fair market value" of the house was really greater than the $500,000 purchase price, he can also recover the difference as part of his "damages."
The power of a Notice of Lis Pendens
The other, more common, alternative is to sue for "specific performance," which is what is known as an "equitable remedy," that does just what its name implies; namely, that it forces the Seller to "perform" by selling the property to the Buyer per the terms of the contract. Should a Buyer file a lawsuit to obtain the remedy of "specific performance," it needs to make sure that the Seller does not sell the property to another buyer while the lawsuit is pending. In order to do this, the Buyer may record, with the County Recorder's office in which the property is located, a document called a "Notice of Lis Pendens." While the use of Latin phrases by lawyers and judges has mostly disappeared over the years, the Latin phrase "lis pendens," which means "pending lawsuit," or "pending dispute," remains very much in use. By recording a "Notice of Lis Pendens," the world is put on notice that there is a lawsuit pending involving a claim of title to the property. And while such a Notice does not technically stop the property owner from selling to another buyer, it effectively does just that, in that any subsequent buyer's title would be taken subject to the claims in the lawsuit, and if the Plaintiff in the lawsuit prevails, the Plaintiff will take title free and clear of any subsequent conveyances.
If the Buyer has chosen not to seek specific performance, and to instead sue for damages, can the Buyer still record a Notice of Lis Pendens, to make sure that it can collect its damages from the Seller if it prevails in the lawsuit? The answer is "no." A Notice of Lis Pendens can only be properly recorded when the lawsuit upon which it is based includes a claim involving the right to title or ownership in the property, and a claim for money damages is not such a claim. A party who wrongfully records a Notice of Lis Pendens could find themselves facing legal action from the property owner for what is called "slander of title," and for that reason, a Notice of Lis Pendens, while a powerful legal tool, should only be used in the appropriate circumstances.
About the Author: David Allen, a partner in the Phoenix law firm of Jaburg Wilk, has been representing clients in both transactional and litigation real estate and business related matters for over thirty years. He is licensed as an attorney in both Arizona and California, and is also a licensed Arizona real estate broker. Got a real estate law question for David? Contact him directly.
This article is not intended to provide legal advice and only relates to Arizona law. It does not consider the scope of laws in states other than Arizona. Always consult an attorney for legal advice for your particular situation.