Q: My buyer decided to cancel because she did not like some of the comments made in the home inspection report. She no longer wanted the home because the inspector had found several instances of the Seller’s lack of proper maintenance. She had not removed or waived the inspection contingency so we issued a CAR Cancellation of Contract form and checked the box in Section 1 indicating that the Buyer was cancelling “as permitted by the good faith exercise of” paragraph 12 of the Agreement. In Section 2, box 2A was checked to get the deposit released to the Buyer.
The Seller is now saying that the inspection report only listed minor items that he would have been willing to repair and thus the Buyer’s cancellation is not being made in good faith. He refuses to cancel the escrow and is demanding that the deposit be released to him.
The Listing Agent had previously mentioned that the Seller has another Buyer in Back-Up; we suspect that the Seller is probably putting them in first position. My Buyer wants her deposit so she can buy something else. She wants me to write to the Seller threatening to file a “lis pendens” against the Property to prevent the sale to the Back-Up buyer if the deposit is not released to her. My client has also asked that I file the lis pendens. What should I do? Should I write the threatening letter? What exactly is a lis pendens and can I file it?
A: A lis pendens is a legal document that is also known in California as a Notice of Pendency of Action (pursuant to Code of Civil Procedure §405.20). A lis pendens can only be recorded against real property when there is a lawsuit that has been filed in the Superior Court that alleges a right to the title of the Property. An example of such a lawsuit is where a Buyer is seeking specific performance of the Purchase Agreement and is asking that the Seller be judicially compelled to convey title to the Buyer.
Whether or not a lis pendens can be filed by your Buyer with the County Recorder’s Office is a legal determination that should only be made by a qualified California real estate attorney who has evaluated the type of claims that the Buyer can legitimately make. Since only a qualified California real estate attorney should determine what type of claims your Buyer can pursue, only that legal counsel should determine what threats can be made and only the Buyer’s qualified California real estate attorney should write a letter to the Seller outlining the Buyer’s legitimate claims.
In this case, since your Buyer has already taken the position that she is not interested in buying the Property, has taken steps to cancel the escrow and is only disputing who should receive the funds deposited into escrow, a qualified California real estate attorney would undoubtedly advise the Buyer that there is no legitimate basis to record a lis pendens.
Therefore, you should not write the letter requested by your client; it could well constitute the illegal practice of law.
NOTE: Both PRDS and SFAR are creating Advisories for Buyers and Sellers about the risks involved in cancelling or terminating real estate purchase contracts. Those Advisories strongly recommend that that real estate Agents refrain from automatically preparing cancellation documentation; instead, Agents should first encourage their clients to consult with qualified California real estate attorneys.
PRACTICE TIPS:
- Before preparing any cancellation documents, real estate Agents should strongly encourage their clients to consult with a qualified California real estate attorney and should provide their clients with any available industry Advisories that explain the risks involved in cancellations.
- When there is a cancellation of a real estate Purchase Agreement and the Parties dispute who is entitled to the funds on deposit, the real estate Agents should not write any letters to the other Agent or the other Parties; the real estate Agents should not make any type of legal threats. Such correspondence should only be written by a qualified California real estate attorney.
- Real estate Agents should not provide any advice to clients regarding the propriety of threatening to file a lis pendens let alone recording an actual Notice of Pendency of Action. The propriety of using a Notice of Pendency of Action for any purpose is the practice of law and should not be undertaken by a real estate licensee.
- Real estate Agents who have a claim regarding who is entitled to a commission and/or who is obligated to pay a commission in either a pending or closed sale do not have a claim regarding title to the Property and, therefore, even if a lawsuit is filed by the Broker, the Broker does not have legitimate basis to record a lis pendens against the Property.
- Improperly filing a lis pendens when there is no pending lawsuit alleging title to the Property is legally deemed to be a slander of title and a tort that can be costly for the person who filed the lis pendens. Standard Errors & Omissions Insurance policies that protect Brokers and their Agents will probably not provide any coverage if an Agent is accused of slandering title.
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.
© Copyright Broker Risk Management 2021 08/20/21