This article discusses a buyer’s use of a purchaser’s lien to enforce a return of monies paid toward the purchase price when a seller breaches a purchase agreement.
Statutory lien against the seller’s property
A real estate broker employed by a seller misrepresents to a prospective buyer the construction (replacement) costs of a building located on a parcel of real estate. The representations result in the buyer and seller entering into a purchase agreement. The buyer makes the agreed-to down payment on the purchase price and escrow closes.
After closing, the buyer constructs further improvements on the property and pays taxes and insurance premiums. Later, the buyer learns the broker misrepresented the costs incurred by the seller to construct the improvements.
Demand is made on the seller to return all monies the buyer paid on the purchase price, the cost of the additional improvements and the taxes and insurance premiums, called rescission.
The buyer will return the real estate to the seller, called restoration.
Does the buyer have a remedy against the seller to recover the payments made toward the purchase price and the expenses related to the property?
Yes! The buyer is entitled to a purchaser’s lien which he can foreclose on the property being reconveyed to the seller. The lien is for the amount of payments made on the purchase price, plus expenditures made to improve the property and to pay taxes and insurance premiums. [Montgomery v. Meyerstein (1921) 186 C 459]
From the moment a buyer enters into an agreement to purchase property, he has an interest in the property which entitles him to a statutory lien against the property for amounts paid on the purchase price if the seller fails to deliver as agreed. [Calif. Civil Code §3050]
The amount of the purchaser’s lien will be offset by the rental value of the buyer’s use of the property while he is in possession. [Montgomery, supra]
The right to a purchaser’s lien for monies paid includes situations where the seller:
fails to deliver up the property;
interferes with the buyer’s right to possession;
fails to sign and deliver agreements or documents;
induces the buyer to enter into the purchase agreement by misrepresentations; or
attempts to avoid the purchase agreement.
Also, the buyer is only entitled to a purchaser’s lien if the seller’s nonperformance is not caused by the buyer’s breach. [Montgomery, supra]
Foreclosing the purchaser’s lien
A buyer does not need to give the seller a notice of rescission before suing to recover the money under a purchaser’s lien.
Also, the purchaser’s lien permits the buyer to record a lis pendens on the property while seeking a court ordered foreclosure of the property to satisfy the purchaser’s lien. The seller’s property is considered the security for the money owed by the seller to the buyer.
For example, a buyer and seller enter into a purchase agreement. The purchase agreement calls for the buyer to make a down payment on the purchase price.
The seller agrees to carry back a note and trust deed for the remaining balance of the purchase price.
The buyer tenders the down payment and signs and delivers the note and trust deed to the seller. The buyer is given possession of the property and the documents remain unrecorded.
However, the seller later refuses to convey title to the buyer.
The buyer then decides not to complete the purchase and commences an action to establish and foreclose a purchaser’s lien for the amount paid towards the purchase price.
The seller claims the buyer is not entitled to a purchaser’s lien since the buyer failed to give a notice of rescission or demand a return of the money paid.
However, by seeking a purchaser’s lien on the property, service of the complaint in the action is notice of the buyer’s rescission of the purchase agreement. Since the seller breached the purchase agreement by failing to convey the property, called a material breach, the buyer is entitled to treat the purchase agreement as terminated and seek recovery of the money previously paid on the purchase price without prior notice.
In addition to being entitled to the purchaser’s lien, the buyer is also allowed to foreclose on the real estate under the lien. [Lockie v. Co-Operative Land Co. (1929) 207 C 624]
The seller is entitled to receive the rental value of the property for the time it was occupied by the buyer.
Purchaser’s lien priority
The priority of a purchaser’s lien goes back to the date of possession by the buyer under the purchase agreement, called the relation back theory.
The purchaser’s lien gives the buyer who takes possession priority over all subsequent buyers or lenders who have or are charged with knowledge of the buyer’s interest in the property.
A subsequent buyer or lender may be aware of the original buyer’s interest in the property if:
the record title to the property, such as a recorded land sales contract or lis pendens, gives notice of the buyer’s interest;
the subsequent buyer or lender has knowledge of the purchase agreement; or
possession of the property by the buyer is inconsistent with the record title.
Consider a buyer and seller who enter into an oral land sales contract. The property is encumbered by a pre-existing first trust deed.
Before the buyer enters into the land sales contract and takes possession, the trust deed lender lends additional funds to the seller under the future advances clause in the trust deed.
The buyer later takes possession of the property and makes all payments on the land sales contract directly to the trust deed lender.
The trust deed lender accepts the payments with full knowledge of the land sales contract between the buyer and the seller.
Later, the trust deed lender again advances additional funds to the seller under the future advances clause in the trust deed.
Meanwhile, the buyer pays the lender all amounts owed on the first trust deed note at the time the buyer took possession. A demand is made on the trust deed lender to release the trust deed lien on the property, called a reconveyance.
The trust deed lender refuses to reconvey the trust deed unless all advances are repaid.
The buyer seeks to enforce the land sales contract against the trust deed lender who demands more for a payoff than is due the seller on the land sales contract.
Since the seller is unable to clear title to the property as agreed to under the oral land sales contract, the buyer is entitled to a purchaser’s lien on the property for all his payments advanced toward the price. Further, the priority of the purchaser’s lien relates back in time to the date of the buyer’s possession of the property under the unrecorded land sales contract.
The purchaser’s lien secures the amounts the buyer paid under the land sales contract and for any improvements, taxes and insurance premiums.
The purchaser’s lien has priority over all advances made by the trust deed lender after the date the buyer took possession under the land sales contract. Advances made by the trust deed lender prior to the buyer’s possession are senior to the purchaser’s lien.
Also, the buyer can quiet title to the property in his name as against the seller and extinguish the trust deed of record after the buyer has paid the trust deed lender the amounts owed under the first trust deed – exclusive of advances made after the date of possession under the land sales contract. [Garcia v. Atmajian (1980) 113 CA3d 516]
Buyer in default
A purchaser’s lien only arises if the buyer’s failure to perform as agreed in the purchase agreement is excused due to wrongful actions by the seller.
For example, a buyer makes a good faith deposit with his offer to purchase the property. The good faith deposit is placed in escrow to be applied to the purchase price on closing. The seller hands his grant deed to escrow.
The buyer fails to fund escrow with the balance of his down payment and the escrow does not close.
However, the seller refuses to release the buyer’s good faith deposit from escrow.
The buyer then seeks to establish a purchaser’s lien for the amount of the deposit.
Is the buyer entitled to a purchaser’s lien when it is the buyer who is in default under the purchase agreement?
No! A purchaser’s lien will not exist in favor of the buyer who defaults. Thus, the buyer who breaches on the purchase agreement by refusing to perform according to its terms is not entitled to a purchaser’s lien to secure any amount the buyer may be entitled to – in spite of his breach. [Merrill v. Merrill (1894) 103 C 287]
However, the seller is not automatically entitled to retain the buyer’s deposit on a buyer’s breach. A forfeiture is not allowed even if a buyer’s breach is deliberate. [CC §1057.3]
However, the seller is entitled to an offset against the buyer’s deposit for any recoverable money losses incurred by the seller. [Allen v. Enomoto (1964) 228 CA2d 798]
Recovering the value of improvements
The purchaser’s lien covers all monies paid out for expenses and improvements on the property. [Montgomery, supra]
However, for the buyer to recover his expenditures on the property, the breach cannot be caused by the buyer.
For example, a buyer agrees in a purchase agreement to buy a parcel of real estate on which a water pumping plant is located. As consideration, the buyer agrees to lay water mains on adjacent property retained by the seller. The buyer will also provide irrigation service to the adjacent property. These promises to perform are not secured by the property sold.
The seller performs as agreed under the purchase agreement by conveying the parcel with the water pumping plant to the buyer. The buyer takes possession of the parcel on which the water pumping plant is located and completes some of the promised improvements on the seller’s property.
However, the buyer does not complete all the improvements as agreed and surrenders possession of the property to the seller, refusing to further perform.
The buyer claims he is entitled to a purchaser’s lien on the property reconveyed to the seller for the value of the improvements completed, with priority to any interest of the seller.
However, the default in the purchase agreement was due to the buyer’s failure to complete the improvements. Thus, the buyer is not entitled to a purchaser’s lien on the property for the cost of the improvements he completed. [Wilson v. Smith (1924) 69 CA 211]
Breaching seller’s quiet title action
Now consider a buyer and seller who enter into a purchase agreement.
The buyer makes a good faith deposit which is deposited into escrow. Before closing, the buyer discovers a defect in the title to the property being purchased and makes a demand on the seller to clear title and close escrow.
The seller cannot show he has good record title which is marketable.
The buyer refuses to complete the transaction and demands a return of his deposit since the seller failed to deliver marketable title as agreed to in the purchase contract. However, the seller refuses to release the buyer’s funds.
The buyer files an action to impose and foreclose a purchaser’s lien on the property to recover the deposit which the seller will not release.
The seller counters with a quiet title action to clear title of the buyer’s purchaser’s lien.
Is the seller entitled to prevail on his quiet title action?
No! The seller may not quiet title and extinguish the purchaser’s lien held by the buyer until the seller returns all money paid toward the purchase price to the buyer. [Benson v. Shotwell (1890) 87 C 49]