Specific Performance of Real Estate Contracts: Legal Blackmail
Beware real property owners: The mere filing of a suit for specific performance (regardless of its ultimate success or the merits) can potentially tie up your property for several years, with or without the existence of a lis pendens. The reason is simple. It is virtually impossible to obtain title insurance necessary to convey title while an action for specific performance is pending. In effect, this can be a form of “legal blackmail.”
Because the law treats each parcel of real property as unique, often a claim for damages for breach of a real estate contract is not practical. Thus, the law allows an aggrieved 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. Although both buyer and seller retain the power to bring a specific performance claim if one believes the other to be in breach of the purchase and sale contract, the buyer has the power to tie up the seller’s property because, in most cases, the seller cannot sell the property once the buyer files a claim for specific performance. This power has the practical effect of allowing the buyer to use the legal system to “blackmail” the seller into either conveying title to the property at a price agreeable to the buyer, or forcing the seller to pay off the buyer to drop buyer’s claim and allow the seller to convey the property to a third party.
This article discusses the legal and practical problems with representing a seller of property confronted with the possibility of being effectively “blackmailed” into settling frivolous claims for breach of a real estate sales contract. We propose that the legislature enact law to protect sellers, which also balances the buyer’s right to access to courts.
Illustrations of Legal Blackmail at Work
Two recent unreported trial court decisions illustrate the point that a specific performance lawsuit can result in legal blackmail.
In one case, the buyer and seller entered into a purchase and sale contract for an unimproved parcel of property to be purchased in four phases for $12,000,000. Under contract, the buyer had the right to extend the closing date for three 30-day periods by paying a $25,000 “extension fee” by a specified date for each extension. The buyer obtained two extensions and paid the $25,000 extension fee.
With regard to the final extension, the buyer informed the seller of its intent to seek an extension and make the required payment. On the date of the scheduled closing, with no extension having been granted, the buyer informed the seller that it did not have the money and stated that it was “all over.” Later that day the buyer surprisingly informed the seller by fax that the “check is in the mail.” The buyer never sent the extension fee. After waiting three days for the check that never arrived, the seller relied on the time is of the essence clause, defaulted the buyer, and terminated the contract.
The buyer subsequently filed a suit for specific performance and placed a lis pendens on the property. On a motion to dissolve the lis pendens, the court ruled that the initial pleading did not show that the action was “founded on a duly recorded instrument” as required by statute to maintain the lis pendens, and that a bond would be required.1 The court dissolved the lis pendens after the buyer advised the court that it had no intention of posting a bond. The seller, nonetheless, could not obtain title insurance to sell the property to a third party until the lawsuit was over. The absence of a lis pendens was thus irrelevant.
In response to the seller’s motion for summary judgment, the buyer claimed that the seller’s patterns of accepting late payments, albeit as an accommodation to the buyer, created a waiver of the “time is of the essence” clause.2 The court ruled that factual issues existed and denied seller’s motion for summary judgment.3 During a 12-day bench trial that was concluded more than a year and a half later, the seller established that a representative of the buyer had threatened to “tie the property up for three years” if the seller would not withdraw its default. The trial court found in an extensive opinion that the buyer’s president had repeatedly lied to the seller and others; that there was no waiver; that the buyer was never ready, willing, and able to close; and that there was no equitable basis for the relief sought by the buyer. While the trial court thus ultimately ruled in favor of the seller, the property was, in fact, tied up for almost two years, and, had the appellate process run its full course, could have been tied up for as long as two to three years or longer. This is not an atypical situation.
As one might expect, the buyer was a shell corporation with a substantial amount of debts and little in the way of assets. The buyer, as was established at trial, had not been able to obtain financing and could not possibly have closed. While the buyer had little to lose other than its own expense of litigation, the seller was burdened with the risk of the down-turn of the market, the costs of litigation, the carrying costs of the property including substantial real estate taxes, and was left only with the prospect of obtaining a judgment for real estate taxes, attorneys’ fees, costs, and possibly slander of title or malicious prosecution, which would be wholly uncollectible unless the seller was able to pierce the corporate veil. “Legal blackmail” was a practical reality.
In yet another recent unreported trial court decision, the unsophisticated owner of an attractive residence on Palm Island on Miami Beach entered into what effectively was a lease/option to purchase contract with a tenant, but had 48 hours to have the contract reviewed by an attorney. Within the allotted time period, the owner elected not to proceed in what was an ambiguous contract coupled with a bad bargain. However, the buyer took the position that the seller had not properly terminated the contract, refused to leave the premises, and the owner was forced to sue for eviction. The tenant responded with a counterclaim for specific performance that tied up the property for over a year even after a settlement agreement was reached requiring the tenant to leave the premises.
On the eve of the agreed-upon scheduled departure the tenant filed for bankruptcy, which deprived the state court of jurisdiction to enforce the settlement and evict the tenant. the time the stay was lifted, the tenant was evicted, and the specific performance claim tried and determined adversely to the tenant, the tenant had occupied the property for a year and a half rent free and tax free. The seller again faced the prospect of a drastic downturn in the market, had lost a year and a half of rent, and had to absorb the real estate taxes and utility bills.
These two cases are not extraordinary situations. The law as it exists today affords an unable buyer the power to force the unwary seller to settle a frivolous claim. This conduct can be characterized as “legal blackmail.”
Specific Performance Claims
To prove a claim for specific performance, a plaintiff must prove the existence of the contract by clear, definite, and certain evidence.4 The plaintiff then must prove that it complied with the conditions of the contract,5 and that it was ready, willing, and able to perform its obligations under the contract.6 The typical specific performance case filed in Florida courts can take from one to three years to reach trial, given the court’s caseload and the amount of discovery typically required by these suits. The appeals process can add an additional year or more to resolve a claim.
With Reducing Losses
The practical reality is that once the lawsuit is filed, the property cannot then 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. Were the seller to convey title to a new buyer, the court would be faced with the possibility of ordering the new buyer to convey to the seller, or to determine an amount of damages sufficient to compensate the successful buyer. Because of this dilemma, a third party is required to convey title to the successful buyer only when the third party is not a bona fide purchaser without notice of the claim. One could argue that the seller, facing a spurious lawsuit for specific performance, could simply invoke the doctrine of caveat emptor and remain silent regarding the specific performance suit. However, as set forth below, such an occurrence is highly unlikely.
Lis Pendens Offers
A common misconception is that title to property is not clouded by the filing of a lawsuit unless it is accompanied by a lis pendens.7 The fiction is that a lis pendens is necessary to give notice to the world of the existence of a suit.8 Many serious legal battles involve trying to dissolve a lis pendens or to force the party filing the lis pendens to post a substantial bond.9 The lis pendens statute requires a claimant to post a bond when the lis pendens places a cloud on title that did not previously exist.10 It would seem to follow that once having succeeded in dissolving a lis pendens, the property owner then should be free to convey title. That, however, is not likely to be the case because the buyer, to be secure in title (meaning superior to all others), must be a bona fide purchaser without notice of the pending action and the possibility that the seller may be obligated, through the loss of a specific performance suit, to convey title to another earlier contracting party.
In fact, it is more likely than not that a lis pendens is not maintained on a property throughout the course of a specific performance lawsuit. In order to maintain a lis pendens, the party seeking the lis pendens must post a bond unless the lis pendens is based on a duly recorded instrument. In the typical case in which a lis pendens is based on a claim for specific performance of a real estate contract, there is no duly recorded instrument already clouding title because the contract is rarely recorded. The claim is thus merely based on an unrecorded contract, and a bond is required to protect the landowner from damages resulting from the new cloud on title.
Bona Fide Purchaser Without Notice
At first blush, it would seem that a seller who has had a lis pendens dissolved while a specific performance suit is pending should simply be able to seek out an uninformed buyer and close the transaction without revealing to the buyer or the buyer’s attorney the pendency of the lawsuit for specific performance. No title defect would appear of record, so the seller should then be able to find a buyer without knowledge of the pending specific performance claim.
Aside from the possibility of a suit for fraudulent inducement by virtue of the alleged failure to disclose a material fact,11 and aside from issues as to whether caveat emptor applies, a more practical barrier exists: the duty of the seller’s attorney.
Knowing of the existence of a specific performance suit, which could affect title, the seller’s attorney is ethically obligated to inform both the buyer’s attorney and the title company of the pendency of the suit.12 Thus, as a practical matter, the buyer becomes informed of the existence of the lawsuit; the buyer is deprived of bona fide without notice purchaser status, and the title company will not provide title insurance. The net effect is that the title to the property is effectively clouded by the mere filing and pendency of the suit and the seller can be effectively blackmailed into having to pay off even the most spurious specific performance lawsuit. It is also possible that by the seller and seller’s attorney even having notice of a threatened specific performance action marketability of the property is at risk.13 In any event, Florida courts have held that the pendency of a lawsuit seeking specific performance of property makes the title to the property unmarketable14 and the threat of legal blackmail exists.
In today’s day and age, the marketability of any parcel of property depends on the buyer’s ability to obtain title insurance. Although a title insurance company theoretically could issue a policy with an exception for an unrecorded interest in property of which it is aware, such as the existence of a specific performance lawsuit involving the property, such a practice is prohibited by most title insurance companies because they might then become involved in the practice of “buying a lawsuit.”15
Is what can sellers reasonably do to protect themselves, and what possible legislative remedies are there for what is clearly an inequitable situation that easily lends itself to egregious abuse.
The answer lies in creating a fair balance between the important right of a real estate buyer who has been the victim of a breach of contract to have access to the courts without that right of access being unreasonably chilled, and the right of a seller to be protected against a cloud for specific performance being placed upon the property by a buyer who merely alleges the elements of a specific performance suit but has few real facts to support it.
One solution lies in the freedom to contract, where the seller could insert a clause in the sale 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 buyer could 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.
An alternative contract solution would be for the seller to 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 seller breached the contract. The doctrine of mutuality of obligation requires a contract to provide that at least some of the terms may be enforced by one party against the other.16 Under Florida law, mutuality of obligation is essential to constitute a valid contract.17
A contractual remedy, however, does not protect the unwary and unsophisticated seller. The legislature could remedy this situation by enacting a statute that protects unsophisticated/unrepresented sellers and provides that as a condition to the remedy of specific performance in real estate transactions, the plaintiff/buyer must post a bond equivalent to a percentage such as 30 percent of the purchase price, plus a reasonable amount for costs and attorneys’ fees, accompanied by evidence that there was a binding financing commitment in effect at the time of the default. Alternatively, the law could provide that the seller be entitled to an immediate hearing, at which time the plaintiff/buyer would be required, under the standards for injunctive relief, to establish the likelihood that the buyer would prevail on the merits. Upon such showing, the buyer then would be required to post a reasonable bond to be established by the court to protect the seller against costs and expenses of defending the lawsuit, as well as the reasonable damages expected from the carrying costs of the property and the seller’s inability to convey the property during the pendency of the lawsuit.
Such a model statute could be the following:
(1) No action for specific performance of a real estate contract may be maintained against an owner of real property unless:
(a) the claimant at the time of filing posts a bond equivalent to 30% of the purchase price to be held by the court to provide seller with damages caused by the filing of the action; and
(b) the claimant alleges (in a sworn complaint) that it had the financial ability to perform under the contract and attaches to the initial pleading evidence of its financial ability at the time of the alleged default.
(2) Where an action for specific performance that does not comply with section (1) is filed, the court upon motion of defendant shall hold an immediate hearing where the claimant shall be required to both show cause why the requirements of section (1) have not been complied with and establish the likelihood of success on the merits of its claim.
s; the solution is relatively simple. Because a specific performance action can cause serious damage to the seller that often may not be remedied through either a slander of title or malicious prosecution suit, particularly when the plaintiff/buyer is insolvent and, thus, has even greater leverage, legislative action is necessary to protect sellers. Alternatively, greater responsibility must be placed upon the seller’s attorney to include provisions in the contract to protect the seller. Given the fact that not all sellers, particularly in residential sales, have the services of experienced and competent attorneys, the best answer lies in fairly drawn remedial legislation since the doctrine of caveat venditor is not sufficient.
Gerald F. Richman is board certified in both civil trial and business litigation. He is president of Richman Greer Weil Brumbaugh Mirabito & Christensen, P.A., with offices in West Palm Beach and Miami, where his practice is complex commercial litigation, such as contracts, securities, antitrust, real estate, class actions, civil fraud, RICO, and other business torts. Mr. Richman is a graduate of the University of Florida with bachelor of building construction and J.D. degrees and past president of The Florida Bar.
Mark A. Romance is an associate with Richman Greer Weil Brumbaugh Mirabito & Christensen, P.A., in Miami and West Palm Beach, where he concentrates in trial and appellate practice, specializing in commercial litigation including real estate litigation. He received his B.A. from George Washington University in 1990 and his J.D. from St. Thomas University School of Law in 1994.
This column is submitted on behalf of the Real Property, Probate and Trust Law Section, Bruce M. Stone, chair, and Brian Sparks and William Sklar, editors.
1 See Fla. Stat. §48.23(3).
2 To support its waiver argument, the buyer relied on Mark v. Hahn, 177 So. 2d 5 (Fla. 1965); and McNeal v. Marco Bay Assoc., 492 So. 2d 778 (Fla. 2d D.C.A. 1986).
3 In its order denying the seller’s motion for summary judgment, the court found that a factual issue existed, holding “whether [seller’s] acceptance of prior late payments constitutes a waiver clearly impacts upon the ultimate issue of whether [seller] breached the Contract by refusing to close.”
4 Muhtar v. Goldman, 419 So. 2d 383 (Fla. 3d D.C.A. 1982).
5 R.P.M. Enter., Inc. v. Murphy, 575 So. 2d 1347 (Fla. 3d D.C.A. 1991).
6 Hollywood Mall, Inc. v. Capozzi, 545 So. 2d 918 (Fla. 4th D.C.A. 1989).
7 Fla. Stat. §48.23 provides the procedures to be followed in obtaining a lis pendens. The statute provides:
“(1)(a) No action in any of the state or federal courts in this state operates as a lis pendens on any real or personal property involved therein or to be affected thereby until a notice of the commencement of the action is recorded in the office of the clerk of the circuit court of the county where the property is, which notice contains the names of the parties, the time of institution of the action, the name of the court in which it is pending, a description of the property involved or to be affected, and a statement of the relief sought as to the property.
(b) Except for the interest of persons in possession or easements of use, the filing for record of such notice of lis pendens shall constitute a bar to the enforcement against the property described in said notice of lis pendens of all interests and liens including but not limited to federal tax liens and levies, unrecorded at the time of filing for record such notice of lis pendens unless the holder of any such unrecorded interest or lien shall intervene in such proceedings within 20 days after the filing and recording of said notice of lis pendens. If the holder of any such unrecorded interest or lien does not intervene in the proceedings and if such proceedings are prosecuted to a judicial sale of the property described in said notice of lis pendens, the property shall be forever discharged from all such unrecorded interests and liens. In the event said notice of lis pendens is discharged by order of the court, the same shall not in any way affect the validity of any unrecorded interest or lien.
(2) No notice of lis pendens is effectual for any purpose beyond 1 year from the commencement of the action unless the relief sought is disclosed by the initial pleading to be founded on a duly recorded instrument or on a lien claimed under part I of chapter 713 against the property involved, except when the court extends the time on reasonable notice and for good cause. The court may impose such terms for the extension of time as justice requires.
(3) When the initial pleading does not show that the action is founded on a duly recorded instrument or on a lien claimed under part I of chapter 713, the court may control and discharge the notice of lis pendens as the court may grant and dissolve injunctions.
(4) This section applies to all actions now or hereafter pending in any state or federal courts in this state, but the period of time above-mentioned does not include the period of pendency of any action in an appellate court.”
8 See, e.g., Beefy King Intern., Inc. v. Veigle, 464 F.2d 1102 (5th Cir. 1972)(purpose of lis pendens is to notify prospective purchasers and encumbrancers that any interest acquired by them in property in litigation is subject to decision of court. While a lis pendens is simply a notice of pending litigation, the effect thereof on the owner of property is to constrain its right to convey title.)
9 Fla. Stat. §48.23(3) provides that “[w]hen the initial pleading does not show that the action is founded on a duly recorded instrument or on a lien claimed under part I of chapter 713, the court may control and discharge the notice of lis pendens as the court may grant and dissolveinjunctions.” This provision was intended to have persons who place a lis pendens on property provide the same protections as a person obtaining an injunction. Sparks v. Charles Wayne Group, 568 So. 2d 512 (Fla. 5th D.C.A. 1990).
10 Mohican Valley, Inc. v. MacDonald, 443 So. 2d 479 (Fla. 5th D.C.A. 1984). In fact, the Florida Supreme Court stated that the bond requirement contained in the lis pendens statute exists merely to permit property holders to protect themselves from irreparable harm. Chiusolo v. Kennedy, 614 So. 2d 491 (Fla. 1993).
11 Arguably, a claim for fraudulent inducement lies just as where a broker fails to disclose a material fact as to the physi cal condition of the property. Such claims are common. See HTP, Ltd. v. Lineas Aereas Costariccenses, S.A., 685 So. 2d 1238 (Fla. 1996) (where the Florida Supreme Court held that the economic loss rule does not bar a common law fraud in the inducement action.)
12 Failure to disclose a known material fact to an opposing attorney or party in connection with the sale of land would violate Rule 4-8.4(c) of the Rules Regulating The Florida Bar (Rules of Professional Conduct), which prohibits a lawyer from engaging “in conduct involving dishonesty, fraud, deceit, or misrepresentation,” and may thus subject the attorney to Bar discipline. Aside from being unethical, such conduct may also expose the attorney to liability to the buyer in tort for fraud or misrepresentation.
13 An agreement to sell and convey real property is an agreement to sell title to land. Where an agreement for the purchase of real property does not specify the character of title, the seller is required to furnish good and marketable title. 44 Fla. Jur. 2d Real Property and Exchanges §47. Even where a contract to purchase specifically provides that a good and marketable title of record is not required, the seller’s failure to disclose the pendency of a known claim to title may subject the seller to liability in tort. Thus, the fact that seller is on notice of a claim, through a “threat” of a specific performance claim, this may prevent the seller from conveying title.
14 Chafetz v. Price, 385 So. 2d 104, 106 (Fla. 3d D.C.A. 1980).
15 See, e.g., Lawyers’ Title Guaranty Fund, Title Notes, §10.05.01 (“Based on the Fund’s insuring and claim experience since its creation, a definite general policy has been established against approving policies in any case where The Fund or Fund Agent has actual knowledge of a definite adverse claim, even though it is not of record. Regardless of the appraisal of the merits of such claim, The Fund does not feel justified in buying possible litigation.”)
16 Wilson v. Sandstrom, 317 So. 2d 732 (Fla.), cert. denied, 96 S.Ct. 782 (1975).
17 Terex Trailer Corp. v. McIlwain, 579 So. 2d 237 (Fla. 1st D.C.A. 1991).