REMEDY OF SPECIFIC PERFORMANCE
The law considers real property unique. Therefore, a claim for damages for breach of a real estate contract is not practical. Thus, the law allows a non-breaching party to file a claim for specific performance which requests the court to order the party breaching the contract to perform its obligations under that contract.
To prove an action for specific performance, a plaintiff must prove the existence of the contract by clear, definitive, and certain evidence. The plaintiff then must prove that it complied with all the conditions of the contract, and that it was ready, willing and able to perform its obligations under the contract.
The mere filing of a legal action for specific performance (regardless of its ultimate success or the merits) can potentially tie up seller’s property for several years, with or without the existence of a lis pendens. The net effect is that the title to the property is effectively clouded by the mere filing of the suit regardless of whether a lis pendens is filed. The marketability of any parcel of property depends on the buyer’s ability to obtain title insurance. It is virtually impossible to obtain title insurance necessary to insure title while an action for a specific performance is pending. Most title companies would not issue a title policy with an exception for a pending specific performance legal action involving the property, and the seller would not be in a position to convey marketable title. Therefore, the buyer has the leverage to tie up seller’s property because, in most cases, the seller cannot sell the property once the buyer files a claim for specific performance. Once the lawsuit is filed, the property cannot be sold to another buyer. If the buyer is successful in its specific performance claim, the court typically orders the seller to convey title in accordance with the terms of the contract.
A common misperception is that the title to the property is not clouded by the filing of a lawsuit unless it is accompanied by a lis pendens. The fiction is that a lis pendens is necessary to give notice to the world of the existence of a legal action. Many serious legal battles involve trying to dissolve a lis pendens or to force the party filing a lis pendens to post a substantial bond.
It would seem that a seller who has had a lis pendens dissolved while a specific performance suit is pending, would simply be able to locate an uninformed buyer and close the transaction without revealing to the buyer, or the buyer’s attorney, the pendency of the legal action for specific performance. No title defect would appear of record so the seller theoretically could be able to find a buyer without knowledge of the pending specific performance action. In addition to the duty of the seller’s attorney to disclose the pending specific performance action, the seller could be sued for fraudulent inducement by virtue of the failure to disclose a material fact.
Since a specific performance action can cause serious damage to the seller, it often may not be remedied through either a slander of title or malice prosecution suit, particularly when the buyer is insolvent. In order to avoid tying up the seller’s property in an action for a specific performance by the buyer, requires creative drafting of the contractual remedies by the seller’s attorney. The seller could include a clause in the contract that as a condition precedent to filing a suit for specific performance, the buyer would be required to deposit in an interest-bearing escrow account the full amount of the purchase price, plus a reasonable sum to reimburse the seller for attorneys’ fees and costs in the event the seller prevails. Alternatively, the contract could provide that the buyer be required to post a bond or letter of credit payable to the seller in the event the seller prevails, in a sum equivalent to the purchase price of the property plus a reasonable amount for attorneys’ fees and costs.
The seller could specifically exclude the remedy of specific performance. In so doing, the seller must provide an alternative remedy for the buyer in the event of a default, such as a mechanism to determine the amount of damages if a court determines that the seller breached the contract.
Provided as an educational service by John Raymond Dunham, III, Esq..
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