Lis Pendens

What is Lis Pendens?

Lis Pendens, Latin for "suit pending," is a formal written notice recorded in the public records to warn all interested parties that a lawsuit has been filed concerning title to, or possession of, specific real property. This notice serves as a crucial alert, indicating that the property's ownership or control is subject to ongoing litigation, and any potential buyer or lender acquiring an interest in the property after the filing of the Lis Pendens will be bound by the outcome of that lawsuit. It effectively creates a cloud on the property's title, making it difficult to sell, refinance, or transfer clear ownership until the underlying legal dispute is resolved.

The primary purpose of a Lis Pendens is to prevent property owners from selling or encumbering real estate while it is the subject of a legal dispute, thereby protecting the plaintiff's potential interest in the property. Without such a notice, a defendant could transfer the property to a third party, who might claim to be a bona fide purchaser without notice, potentially frustrating the plaintiff's ability to enforce a judgment against the property. By recording the Lis Pendens, the plaintiff ensures that anyone dealing with the property is deemed to have constructive notice of the litigation, meaning they are legally presumed to know about the lawsuit, regardless of whether they actually checked the public records.

How Lis Pendens Works

The process of filing a Lis Pendens is relatively straightforward but carries significant legal weight. It typically begins when a plaintiff files a lawsuit that directly affects the title or right to possession of real property. Examples of such lawsuits include foreclosure actions, quiet title actions, partition suits, specific performance claims for real estate contracts, or disputes over property boundaries or easements. Once the lawsuit is filed, the plaintiff or their attorney can then record a Lis Pendens notice with the county recorder's office in the county where the property is located.

Key Characteristics

• Public Record: A Lis Pendens is a public document, recorded in the same manner as deeds and mortgages, making it accessible to anyone conducting a title search on the property.
• Constructive Notice: Its recording provides constructive notice to the world, meaning all subsequent purchasers, lenders, or encumbrancers are legally presumed to know about the pending litigation.
• Property Specific: The notice must clearly identify the specific real property involved in the lawsuit, usually by its legal description.
• Tied to Litigation: A Lis Pendens is valid only as long as the underlying lawsuit is active. If the lawsuit is dismissed, settled, or a final judgment is entered, the Lis Pendens should be expunged or cancelled.

Types of Actions Leading to Lis Pendens

Various legal disputes can lead to the filing of a Lis Pendens. Understanding these helps investors identify potential risks:

• Foreclosure Proceedings: When a lender initiates a lawsuit to foreclose on a mortgage, a Lis Pendens is typically filed to inform the public that the property is subject to a foreclosure action.
• Quiet Title Actions: These lawsuits are filed to resolve disputes over property ownership or to remove a "cloud" on the title, such as an old lien or an unclear boundary.
• Specific Performance: If a seller breaches a real estate purchase agreement, the buyer might sue for specific performance, asking the court to compel the seller to complete the sale. A Lis Pendens would protect the buyer's interest.
• Partition Suits: When co-owners of a property cannot agree on its use or sale, one owner may file a partition suit to force the sale of the property and divide the proceeds.
• Easement Disputes: Lawsuits concerning the right to use another's land for a specific purpose, like access to a road, can also result in a Lis Pendens if the outcome affects property title.

Implications for Real Estate Investors

For real estate investors, a Lis Pendens is a red flag that demands immediate attention and careful due diligence. It signifies that the property's legal status is uncertain, and any investment made could be jeopardized by the outcome of the pending lawsuit.

For Buyers

• Risk of Losing Interest: If a buyer purchases a property with a recorded Lis Pendens, they take the property subject to the outcome of the lawsuit. If the plaintiff wins, the buyer could lose their interest in the property, or their ownership could be significantly altered.
• Financing Difficulties: Lenders are highly reluctant to provide financing for properties with a Lis Pendens because of the inherent title risk. This often means a cash-only purchase, significantly limiting the pool of potential buyers.
• Title Insurance Issues: Title insurance companies will typically refuse to insure a property with an active Lis Pendens, as it represents an uninsurable risk to the title.
• Due Diligence Necessity: Buyers must conduct thorough title searches and consult with legal counsel to understand the nature of the lawsuit and its potential impact before proceeding with any transaction.

For Sellers

• Inability to Sell: A Lis Pendens makes it nearly impossible to sell a property with clear title, as most buyers and lenders will shy away from the associated risks.
• Reduced Property Value: If a sale is even possible, the property will likely command a significantly lower price due to the title defect and the limited buyer pool.
• Legal Costs: Sellers will incur legal costs to defend against the underlying lawsuit and potentially to expunge the Lis Pendens, even if the suit is frivolous.
• Reputational Damage: For professional investors or developers, having a Lis Pendens on a property can signal financial or legal troubles, potentially impacting future dealings.

For Lenders

• Impaired Collateral: A Lis Pendens significantly impairs the value and marketability of the property as collateral for a loan.
• Priority of Liens: If a Lis Pendens is recorded before a mortgage, the mortgage could be subordinate to the outcome of the lawsuit, potentially jeopardizing the lender's security interest.
• Increased Risk: Lenders face increased risk of default and difficulty in recovering their investment if the property's title is compromised.

Step-by-Step Process: Dealing with a Lis Pendens

Whether you are a buyer, seller, or an investor encountering a Lis Pendens, a structured approach is essential to navigate the complexities and protect your interests.

1. Step 1: Identify the Lis Pendens: Conduct a thorough title search or review the preliminary title report. The Lis Pendens will be listed as an encumbrance or lien on the property.
2. Step 2: Obtain the Underlying Lawsuit Documents: Request copies of the complaint and other relevant court filings associated with the Lis Pendens. This will reveal the parties involved, the nature of the dispute, and the specific relief sought.
3. Step 3: Consult Legal Counsel: Immediately engage a real estate attorney experienced in title litigation. They can analyze the lawsuit's merits, assess the potential impact on the property, and advise on the best course of action.
4. Step 4: Evaluate Risk and Opportunity: Based on legal advice, determine the likelihood of the plaintiff prevailing and the potential consequences. For buyers, this might mean walking away or negotiating a significant discount. For sellers, it means strategizing to resolve the underlying dispute.
5. Step 5: Negotiate Resolution (if applicable): If you are a party to the lawsuit or are considering purchasing the property, explore options to resolve the underlying dispute. This could involve settlement, mediation, or negotiating for the Lis Pendens to be expunged or released.
6. Step 6: Expunge or Release the Lis Pendens: Once the underlying lawsuit is resolved (e.g., dismissed, settled, or judgment entered), ensure that a formal document expunging or releasing the Lis Pendens is recorded in the public records. This clears the cloud on the title.

Real-World Examples

Understanding Lis Pendens through practical scenarios helps illustrate its impact on real estate transactions.

Example 1: Buyer Discovery

An investor, Sarah, is under contract to purchase a single-family rental property for $350,000. During her due diligence, the title company's preliminary report reveals a Lis Pendens recorded against the property. The notice indicates a lawsuit filed by a previous contractor claiming $25,000 for unpaid work and seeking to enforce a mechanic's lien, which could lead to foreclosure if not paid. Sarah's attorney advises her that if she proceeds with the purchase, she would take the property subject to this lien and the ongoing lawsuit. The lender also refuses to fund the loan until the Lis Pendens is cleared. Sarah decides to terminate the purchase agreement, losing her inspection costs but avoiding potential liability for the contractor's claim and the hassle of litigation.

Example 2: Seller's Dilemma

David, a property owner, wants to sell his multi-unit apartment building for $1.2 million. He receives an offer, but before closing, a former business partner files a lawsuit claiming a 25% ownership stake in the property and records a Lis Pendens. This immediately halts the sale. David's attorney advises him that he must either settle with the former partner, which might cost him $150,000, or fight the lawsuit in court, which could take years and incur hundreds of thousands in legal fees. The potential buyer, unable to secure financing due to the cloud on title, withdraws their offer. David is now stuck with the property, unable to sell or refinance, until the lawsuit is resolved, highlighting the significant financial and time costs.

Example 3: Investor Opportunity (with extreme caution)

An experienced distressed asset investor, Mark, identifies a property with a Lis Pendens indicating a complex quiet title action. The property is listed for $200,000, significantly below its market value of $300,000 if the title were clear. Mark's extensive due diligence, including reviewing court documents and consulting with legal experts, reveals that the Lis Pendens stems from a dispute over an old, minor boundary line error and an unrecorded easement, rather than a major ownership challenge. He estimates the legal costs to resolve the quiet title action and clear the Lis Pendens to be around $15,000-$20,000. Mark decides to make a cash offer of $180,000, factoring in the legal costs and the time it will take to clear the title. After successfully acquiring the property and resolving the title issues over six months, he sells it for $290,000, realizing a substantial profit. This strategy is extremely high-risk and requires deep legal expertise and significant capital.

Mitigating Risks and Best Practices

For real estate investors, proactive measures and careful due diligence are paramount when dealing with Lis Pendens. Here are some best practices:

• Always Conduct a Thorough Title Search: Before any real estate transaction, ensure a comprehensive title search is performed by a reputable title company. This is the primary method for uncovering recorded Lis Pendens and other title defects.
• Understand the Underlying Litigation: Do not just acknowledge the Lis Pendens; delve into the specifics of the lawsuit. What is the nature of the claim? Who are the parties involved? What is the potential impact on the property's title and value?
• Seek Expert Legal Counsel: A real estate attorney specializing in title matters is indispensable. They can interpret the legal implications, advise on potential risks, and guide you through the process of resolution or avoidance.
• Negotiate Contingencies: If you decide to proceed with a purchase despite a Lis Pendens, ensure your purchase agreement includes strong contingencies that allow you to withdraw if the Lis Pendens is not cleared by a specific date or if the lawsuit's outcome is unfavorable.
• Consider Title Insurance Carefully: Be aware that title insurance policies will likely exclude coverage for any issues arising from an active Lis Pendens. Understand these limitations before closing.
• Avoid Speculative Purchases (Unless Highly Experienced): While a Lis Pendens can sometimes present a deeply discounted investment opportunity, these are extremely high-risk ventures suitable only for seasoned investors with significant legal knowledge, capital, and a high tolerance for risk.
• Maintain Clear Records: For sellers, ensure all property-related documents, contracts, and communications are meticulously organized to quickly address any potential disputes that could lead to a Lis Pendens.

Conclusion

Lis Pendens is a powerful legal tool designed to protect the integrity of real estate titles during litigation. For real estate investors, it represents a significant hurdle that can complicate or even derail transactions. While it signals potential distress and, in rare cases, a deep discount opportunity, the risks associated with a Lis Pendens are substantial. Diligent title examination, thorough understanding of the underlying legal dispute, and expert legal counsel are indispensable for navigating properties affected by a Lis Pendens, ensuring investors can make informed decisions and protect their assets.