Worried a lis pendens will lock your deal in a legal stalemate? Learn how to navigate the lis pendens and ensure your deal closes smoothly.
Clouding the title with a notice
A seller and buyer enter into a purchase agreement for a residential property. Several days into escrow, the seller discovers the price set by the purchase agreement is 20% below the property’s current market value.
Prior to closing, the seller receives a backup offer for a price substantially above the price agreed to in the existing purchase agreement. The seller enters into a purchase agreement with the back-up buyer, contingent on the cancellation of the existing purchase agreement and escrow.
To induce cancellation of the existing escrow, the seller refuses to perform any of the conditions required to close. However, the existing buyer performs all buyer obligations for a timely closing.
The seller has no justifiable excuse to cancel the purchase agreement and escrow entered into with the existing buyer. Nevertheless, the seller sends a Notice of Cancellation to escrow. Mutual cancellation instructions are prepared by escrow and forwarded to the buyer for signatures.
The buyer refuses to sign the cancellation instructions. They buyer makes a demand on the seller to convey the property under the terms of their purchase agreement and escrow instructions. The seller refuses.
The existing buyer is concerned the seller will convey the real estate to the back-up buyer, resulting in the back-up buyer acquiring an interest in the property superior to the existing buyer’s rights to buy the property.
Does a legal mechanism exist for the existing buyer to notify all future buyers, lenders and tenants of the buyer’s claim to ownership of the real estate before the seller conveys an interest in the property to them?
Yes! A lis pendens, or Notice of Pending Action, is notice which is recorded to put all prospective buyers, leasees or encumbrancers who might acquire an interest in the property on notice that title or possession of the real estate described in the lis pendens is in dispute. [Calif. Code of Civil Procedure §405.2]
A lis pendens preserves a person’s rights to real estate until the dispute with the owner is resolved.
Without a recorded lis pendens or physical possession of the real estate, the person who claims an interest or right to possession risks the owner conveying the property to another buyer, lender or tenant.
Title or possession to real estate
A lawsuit must affect title or the right to possession of real estate to support the recording of a lis pendens. [CCP §405.20]
The recording of a lis pendens is permitted for the following types of lawsuits:
- specific performance of unclosed transactions or rescission of closed transactions [Wilkins v. Oken (1958) 157 CA2d 603];
- judicial foreclosure of a trust deed lien by a lender [Bolton v. Logan (1938) 30 CA2d 30];
- foreclosure of a mechanic’s lien by a construction contractor [Calif. Civil Code §3146];
- cancellation of a grant deed or other conveyance by a prior owner;
- fraudulent conveyance to be set aside as voidable by creditors [Hunting World, Incorporated v. Superior Court (1994) 22 CA4th 67];
- evictions and suits concerning unexpired leaseholds brought by tenants or leasehold lenders;
- termination or establishment of an easement between neighboring property owners [Kendall-Brief Company v. Superior Court of Orange County (1976) 60 CA3d 462];
- government declaration that a building is uninhabitable;
- ejectment of an unlawful occupant (other than a tenant) from real estate by an owner;
- partition or sale of the real estate by a co-owner;
- quiet title actions;
- eminent domain actions [CCP §1250.150];
- divorce proceedings involving real estate;
- actions by adverse possessors to determine claims to title [CC §1007];
- actions to re-establish lost land records [CCP §751.13];
- actions to determine adverse interests in any liens or clouds on real estate arising out of public improvement assessments [CCP §801.5];
- actions by purchasers or the state to quiet title to tax-deeded property [Calif. Revenue and Taxation Code §3956];
- actions by innocent improvers of real estate against owners or lenders of record [CC §1013.5(b)];
- actions on an improvement bond [Calif. Streets and Highways Code §6619]; and
- actions terminating or establishing an easement, except for a public utility easement. [CCP §405.4(b)]
Improper use of a lis pendens
Actions in which it is improper to record a lis pendens include:
- suits affecting title to personal property located on real estate;
- foreclosure on real estate by a trustee’s sale;
- actions to impress a trust on personal property being recovered;
- actions to recover attorney fees;
- actions for breach of a real estate agreement when only money losses are sought;
- actions for recovery of a brokerage fee on the sale or lease of property; and
- actions against a partner, member or stockholder co-owning real estate as a partnership, limited liability company (LLC) or a corporation.
Constructive trust on improper vestee
A lis pendens may be recorded in an action to impose a constructive trust on real estate.
A constructive trust is an involuntary, court-created trust imposed on the ownership of property held by an owner who acquired it through:
- fraud (force, duress, undue influence, deceit or mistake);
- the violation of a trust or agency relationship; or
- some other wrongful act. [CC §2224]
Constructive trusts establish the wrongdoer holding title to the property as an involuntary trustee holding title to property for the benefit of the person actually entitled to the property. [CC §2224]
Note that a constructive trust is only proper when the property is purchased, not just improved, with fraudulently acquired money.
Thus, recording a lis pendens on property merely improved by the use of fraudulently acquired funds is improper. [Burger v. Superior Court of Santa Clara County (1984) 151 CA3d 1013]
The lis pendens process
A lis pendens is to:
- identify the parties to the lawsuit; and
- give an adequate description of the real estate. [CCP §405.20; McLean v. Baldwin (1902) 136 C 565]
The object of the lawsuit and its affect on title or possession of real estate does not need to be stated in the lis pendens. However, the objective of the lawsuit must be stated for it to be considered an absolutely privileged publication. [CC §47(b)(4)]
Editor’s note — An absolute privilege covers any publication during a judicial proceeding which is authorized by law, including a lis pendens. A publication made under absolute privilege bars a slander of title action against the person wrongfully claiming an interest in the property.
A lis pendens needs to be both filed and indexed in the county recorder’s office where the property is located to give constructive notice about the existence of a dispute over title or possession of the property. Any person who is later conveyed an interest in the property is thus bound by the final resolution of the dispute. [CCP §405.20; Dyer v. Martinez (February 23, 2007) 147 CA4th 1240]
Title insurers and specific performance actions
Title companies usually refuse to insure title when a lis pendens involving a specific performance action has been recorded against title.
As a result, property subject to specific performance actions is often rendered unmarketable while the lis pendens is in effect.
Nonetheless, the lis pendens is valuable for preserving the buyer’s right to purchase the property. The recording of a lis pendens often persuades a hedging seller to perform.
On the flip side, the potential for abuse of the lis pendens is apparent.
Further aggravating to hostile owners is the rule that a recorded lis pendens identifying a court action which concerns title or right of possession to real estate is absolutely privileged communication. [CC §47(b)(4)]
Expungement of a lis pendens
A wrongfully recorded lis pendens can be removed quickly. [CCP §§405.30 et seq.]
After a lis pendens is recorded, anyone with an interest in the property affected may file a motion asking the court to remove the lis pendens from the record, called expungement.
An order expunging a lis pendens removes from title restrictions imposed by the lawsuit on the transfer of the property described. [CCP §405.61]
After expungement, another lis pendens may not be recorded against the property by the same person without the permission of the court. [CCP §405.36]
In the event an owner contests a lis pendens which clouds title to their property, the individual filing the lis pendens has to prove:
- the action affects title or the right of possession to the property described in the notice; and
- a valid claim exists on which the individual is likely to prevail at trial. [Hunting World, Incorporated, supra]
For case examples and a more in-depth discussion of the lis pendens, see Volume 3 of the first tuesday Realtipedia, Legal Aspects (Chapter 42: The lis pendens).
The first tuesday Realtipedia is your premier 16-volume library of real estate guides, an included service with your enrollment. Want more Realtipedia? Log in to your account with your license number and last name, and click on the Realtipedia link. Realtipedia is also available for purchase in a hard copy format here.