Protecting against Specific Performance Lawsuits
By Bryan Mashian, Esq.
A remedy available to a real estate buyer is to sue for the seller to sell the property to the buyer on the agreed upon price and terms. As part of this lawsuit, called specific performance, the buyer can record a notice that an action is pending, known as lis pendens. This notice practically disables the seller from selling, leasing or financing the property until the case is resolved. An unscrupulous buyer can tie up the property in litigation for a long time and the seller may eventually be ordered to sell at the original sale price. The prudent seller can take some precautions to reduce the chances of being tied up by a meritless or frivolous specific performance lawsuit by qualifying the buyer before entering into a deal and by negotiating protections in the purchase and sale agreement.
Qualify the Buyer
- The seller should verify that the buyer is financially capable of purchasing the property and closing per the buyer's offer.
- If the buyer needs to obtain a loan, the seller should determine how qualified the buyer is to obtain this financing and how long it will realistically take to fund the loan.
- If the buyer has to sell or exchange another property as part of the deal, then the seller should assess if and when the sale of the other property will close.
- The seller should find out if the proposed buyer is litigious or likely to file a lawsuit. The seller can search the public court records to find out the buyer's litigation history.
- If the buyer has such a history, then the seller should consider moving on to another buyer.
- The seller should obtain as large of a deposit as possible to make sure the buyer is serious.
- Even then, the seller should consider requiring the buyer to release all or a part of this deposit outside of escrow when the buyer's contingencies are satisfied.
- The seller should require the buyer to provide references from banks, employers, accountants and similar people.
Get Contractual Protections
Once the seller has qualified the buyer, negotiating a tight purchase and sale agreement will further protect the seller:
Waiver of Specific Performance
- Ideally, the seller would have the buyer completely waive the right to sue for specific performance. This request, however, may spook the buyer since this waiver weakens the buyer's position, assuming the waiver is enforceable.
- If the buyer will not give a complete waiver, then the seller can put limits and conditions on the buyer's right to sue for specific performance, such as allowing specific performance only if the escrow is ready to close but the seller refuses to sign and deliver the deed.
- To lessen the severity of the impact of a waiver, the seller can offer the buyer liquidated damages in lieu of specific performance. This has an equitable appeal since real estate purchase and sale contracts often have a provision liquidating damages to the seller if the buyer defaults. Such a provision would make the liquidated damages clause reciprocal.
- The buyer has four years from the seller's breach to start a specific performance action.
- The seller can request to reduce this time period from four years to, for example, 60 days, after breach by the seller.
- A specific performance action is not entitled to any special priority and may take years in the court system. In the meantime, the seller's property is tied up.
- To expedite resolution, the seller should consider binding arbitration as a generally quicker and less expensive route than litigation.
- Sometimes the buyer uses or even creates a dispute over contract interpretation as an excuse for recording a lis pendens.
- The seller should make sure that the purchase and sale contract is clear, certain and complete.
The seller should take the above steps to reduce the overwhelming advantage of the buyer in a specific performance lawsuit.
This information has been provided courtesy of Bryan Mashian, Esq. He can be contacted at: www.mashianlaw.com