Peter D. Gordon & Associates

Peter D. Gordon
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8052 Melrose Ave 2nd Fl
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Peter D. Gordon, Esq. recently wrote this article for the Los Angeles Business Journal in an issue devoted to Real Estate Development in Southern California. The article deals with court enforcement measures in connection with real estate purchase-sale agreements.

You can read it easily below, or download it as a scan from the journal here:
Los Angeles Business Journal, Volume 32, Number 34, August 23, 2010.

Enforcing Buy/Sell Agreements: The Lis Pendens Labyrinth
by Peter D. Gordon, Esq.

The present real estate market creates an environment in which sellers now seek to compel buyers to complete a purchase when loan funds are unavailable or the buyer is otherwise unable to perform. However, sellers must rely on general breach of contract rules which are usually limited in most sales contracts by a liquidated damages clause. On the other hand, California has developed a highly regulated system for compelling a seller to complete a sale transaction. The statutorily delineated lis pendens procedure is complex but it provides an instantaneous remedy to a buyer by allowing him to place a lien on the title of the seller: once a suit has been filed, and a notice of the lis pendens recorded with the County Recorder’s Office, the lawsuit creates a cloud on title preventing the seller from making another sale or obtaining title insurance.

This article will briefly outline the complexities, consequences and risks associated with recording a lis pendens by a buyer. An experienced litigator, familiar with this technical area of the law, is most suited to undertake the prosecution of a specific performance case by means of the recordation of a lis pendens--or to file to expunge an improper use of such a lien.

Seller Repudiates Sale Agreement

Assume the buyer wants the property since it is unique and the price is advantageous. Most purchase agreements require that a mediation, followed by a binding arbitration, must be pursued to enforce the purchase contract. Nevertheless, a lawsuit may be filed specifically for the purpose of recording a lis pendens, so as to create a lien on the property in issue and preserve the prospective purchaser’s priority position. A lis pendens is picked up by any title insurance company and prevents the issuance of a title policy to any other prospective buyer. Furthermore, once a lis pendens is on record against the title of a specific property, it will remain there for the duration of the entire action unless an expungement motion is brought under the provisions of CCP § 405.30, etc.

Assume further that a lawsuit to force the seller to convey the target property has been filed, a lis pendens recorded, and the title is now clouded against any other buyer.

Probable Validity

After three generations of statutory refinements, CCP § 405.32 holds that a lis pendens recorded by a plaintiff seeking specific performance of the sale contract will be expunged if the claimant “has not established by a preponderance of the evidence to probable validity of the real property claim.” The “probable validity” standard is drawn from attachment law in the world of provisional remedies, which requires substantial factual support to the claim by the buyer.

Expungement of Lis Pendens

Inevitably, once a lien is filed, then the defendant seller hires counsel to remove – expunge out of existence – the lis pendens. The expungement hearing involves a “mini-trial” of the case. The expungement hearing judge is required to make an evaluation of the overall merits of claimant’s/buyer’s case. The requirement that the Court scrutinize the ultimate provability of the plaintiff’s case is based on the fact that the recordation of a lis pendens gives a claimant an immediate, de facto lien on the subject property. In the mini-trial, the claimant seeking specific performance must objectively establish the probability of his real property claim or else suffer the expungement of the lis pendens.

Bonding of the Lis Pendens: The Tail that Wags the Dog

In defending against the lis pendens claim, if the claim is legitimate, the fixing of the bond amount can prove to be pivotal. A large bond, say a million dollars or more, may prevent a plaintiff from being able to post the bond. Thus, even where the seller loses and the expungement motion is denied, but only on condition that plaintiff must post a bond to keep the lis pendens as a lien pending trial, the cost of the bond can become an insurmountable hurdle. Consequently, the defense to a lis pendens expungement may take the form of seeking a prohibitively expensive bond, which in itself can prevent the plaintiff from keeping the lien on title. Otherwise, the defendant seller seeks the highest bond amount as the plaintiff/buyer’s cost of keeping the lien on the property until trial.

Bond Is Adequate - Property Not Unique

Under CCP § 405.33, even if the plaintiff can show that he has a valid “real property claim,” and meets the prerequisite of showing the “likelihood of prevailing,” the lis pendens can be expunged if the court finds that adequate relief can be secured to the claimant – because the property is not unique – by means of an undertaking in the form of a bond. Traditionally, a single family home, if the purchaser intends to live in it, is per se deemed to be unique and thus a monetary bond would be insufficient. However, most commercial properties, which can be substituted for by another parcel, are not “unique” and thus can be bonded around. Experienced counsel can try to argue that a particular corner, or a particular set of improvements, does indeed represent any irreplaceable opportunity, which would preclude expungement predicated on a bond.

Risks Associated with a Lis Pendens

Normally, the “prevailing party” in the lis pendens expungement procedure is entitled to attorneys’ fees and costs under CCP § 405.38. In a motion to expunge, if the owner/moving party prevails, he will almost automatically be entitled to both attorneys’ fees and costs. On the other hand, if the plaintiff/buyer is successful in preventing the expungement of the lis pendens, then the buyer will be deemed to be the prevailing party. Awards of fees and costs in this type of expungement motion can exceed $10,000, representing a cautionary concern. Furthermore, if the lis pendens is expunged, the period of time during which the lis pendens was on title could also create a basis of liability as against both the buyer/claimant and his counsel for an action for slander of title. See Civil Code § 47(b)(4) and the case of Palmer v. Zaklama 109 Cal.App. 4th 1367 (2003). Slander of title can result in a substantially higher claim of damages by the prevailing seller.

A lis pendens creates an instant cloud on title, but it brings with this “quick freeze” lock on a property some serious risks.

Peter D. Gordon
August 17, 2010



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