BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
I receive numerous inquiries as to whether agents or parties can file a notice of pendency of action, also known as a lis pendens. Agents have asked whether they can record a lis pendens to collect a commission from a seller. I recently received an inquiry from a tenant whose landlord sold the property and made promises, which are not being kept by the new buyer regarding rent. That tenant inquired as to whether they could record a lis pendens.
A lis pendens is a document recorded against the title of property, which is a notice to the public that the author/recorder has a right or interest in the property. For example, if a buyer has a contract to purchase a property and the seller refuses to sign the closing documents, the buyer could record a lis pendens. A lis pendens cannot be used for any purpose other than to evidence an interest in title to real property.
A lis pendens cannot be recorded without a lawsuit. The lawsuit must allege the interest the plaintiff/recorder has in the property. Relating to the prior example, a seller who defaults on a contract, could be sued by a buyer for specific performance to force the sale. Assuming the buyer has a good faith right to the property, the buyer can record a lis pendens.
The lis pendens puts the public on notice of the recorder’s interest in the property. Title insurance companies generally, will not insure title to a property, where a lis pendens is recorded in favor of the third party. Therefore, in the example above, if a buyer files a lawsuit and records a lis pendens, the seller cannot sell the property to another party or that second buyer takes subject to the interests of plaintiff/buyer number one.
While a lis pendens appears to be an excellent tool for tying up title to property, they are risky. The law provides that if a lis pendens is recorded and a court expunges it (removes it), because it is not recorded in good faith or the buyer does not have a legitimate interest in the property, the plaintiff/recorder can be ordered to pay all of the owner’s attorney’s fees, costs and related damages. Using the example above, if a buyer does not have a legitimate interest in a property and the seller is found not to have defaulted, and the buyer records a lis pendens and the court removes it, the buyer could be responsible for the seller’s attorney’s fees, costs, and damages for holding the property off the market. These amounts can be significant. Therefore, recording a lis pendens is not to be taken lightly and should never be recorded without consultation from a qualified California real estate attorney.
PRACTICE TIPS:
- Agents should never record liens against properties in which they are representing a party.
- If a buyer or seller wants to record a lien, agents should immediately refer them to a qualified California real estate attorney.
- Agents should refrain from making recommendations or advising clients to record liens against properties.
- If a lis pendens is recorded against a client’s property, the agent should immediately refer that client to a qualified California real estate attorney.
- If a lien is recorded against a seller’s property, agents should stop the transaction until legal counsel can address further handling.
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is an attorney-client privileged communication 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.