Imagine a deal where you are under contract and the seller no longer wants to sell the home or wants more money; what do you do? Investors know that they have to record a lis pendens to stop another transfer of property. What many people don’t realize is that before you can record a lis pendens, you must actually file a lawsuit over title.
Lis pendens is Latin for “suit pending.” It literally means that there is a currently pending lawsuit over ownership of real property. This is where the “cloud” on title comes from – it is not the lis pendens itself that clouds title, but the underling lawsuit. The lis pendens provides constructive notice to the world that if they take title to the property, they take it subject to whatever the outcome is in the lawsuit. It is because of this that title companies will not insure properties when there is a recorded lis pendens – the title company will require that the underlying lawsuit be dismissed before they provide insurance.
To record a valid lis pendens, two main elements must be met: (1) there is a pending lawsuit; and (2) that lawsuit must affect the ownership of real property referenced in the lis pendens. If a lis pendens is wrongfully recorded, there are monetary sanctions. It is important that both elements are met before a lis pendens is recorded. The first element above is easy to understand: there must be a pending lawsuit. This means that it actually has to be filed, not just that it is being considered.
The second element is harder to understand: the lawsuit must affect title to real property. Therefore, if you are an investor and you are owed money on a sandwich real estate transaction for which you sold an option agreement, you can’t record a lis pendens. Your interest is just to get your money, you aren’t seeking title and thus a lis pendens would be wrongful. Therefore, you could sue to get your assignment funds, and even if you win, you could still lose on a counterclaim for recording a wrongful lis pendens. On the other hand, if you are a buyer on a property and the seller refuses to sell it, then it would be appropriate to file a lawsuit for specific performance to get title, and then record the lis pendens. Once the lawsuit has been filed, then the lis pendens can be recorded and it would protect you from losing your interest to a third party.
By Mark B. Zinman, Zona Law Group