THE DOWNSIDE OF SPECIFIC PERFORMANCE

By Albert G. Marquis, Esq.

Most lawsuits are for money--even those for breach of contracts. In fact, it could be said that parties have a right to breach a contract if they want. There is nothing illegal about breaching a contract. The aggrieved party's remedy is to sue for damages.

One exception is the real estate contract. Because real estate is viewed as unique, the courts have generally taken the position that a lawsuit for damages may not be an adequate remedy. Thus, in a real estate setting, a buyer can sue for specific performance--a remedy whereby the court orders the seller to sell the property on the terms and conditions set forth in the contract. Generally speaking, when an aggrieved buyer initiates such a lawsuit, he records a lis pendens--notice to the world that he has a claim against the title of the property. He sues the seller, and they proceed through discovery and to trial like in any other lawsuit.

From the seller's perspective, however, there is a real downside to such litigation. First, his property becomes unmarketable during the entire course of the litigation. So long as the lis pendens remains on record, he cannot refinance or sell his property. Of course, there are methods by which the seller can have an improper lis pendens removed, but if a buyer appears to have a legitimate contract to purchase, the court will generally leave the lis pendens in place.

Another downside for the seller is the fixed purchase price. During the course of the litigation, the property generally appreciates in value--sometimes exponentially. But there is no rule that requires the buyer to pay for that appreciation. Thus, by the time the case comes to trial, the property may have doubled or tripled in value, but if the buyer wins, he will only be required to pay the original agreed-upon purchase price. The opposite is seldom true. First, it would be highly unusual for the property to decline in value over the course of the litigation. But even if that were to occur, the buyer could simply back off and accept the seller's refusal to sell. Thus, the seller stands to lose, but not to gain, by virtue of a specific performance lawsuit.

Sellers who find themselves embroiled in a specific performance lawsuit often become desperate. They cannot refinance their property. They cannot sell their property. They cannot even get their case to come to trial, and the plaintiff/buyer really doesn't care how long the case takes. Whereas most plaintiffs try to get a case to come to trial as soon as possible, a buyer seeking specific performance actually wants the case delayed. This puts the seller in a definite no win situation. Sellers, therefore, become anxious to resolve the dispute. They will often pay a substantial sum to the plaintiff to settle the case--even if the plaintiff has a weak claim.

Realizing this, there are many unscrupulous real estate investors who want to tie up a person's property in order to extort a favorable settlement from the landowner. To accomplish this objective, they need to get the seller to sign something . Often the seller has signed nothing more than a letter of intent or a rough draft of a contract. Sometimes the seller is told, “I just need your signature on this so I can show my lender,” or “I just need your signatures so my attorney can prepare a formal document.” The next thing a seller knows, he is being sued for specific performance, and those oral representations are not even admissible in evidence.

Another way that sellers find themselves between the proverbial rock and a hard place is to execute agreements with two different buyers. Sometimes a seller might think that the first agreement is dead. For example, maybe an escrow is opened, but the buyer failed to fund the escrow. No one has heard from the buyer, and everyone assumes that the buyer does not intend to go through with the contract. Therefore, the seller enters into a new contract and then the first buyer files a lawsuit for specific performance. His arguments may border on being frivolous (we had an oral agreement to extend the escrow, the seller didn't fully perform his portion of the contract, etc.), but if it is enough to keep the judge from throwing the case out, the seller finds himself in a real bind.

Also, it is not uncommon for a buyer to fail to fund an escrow by the close of the escrow (“COE”) date with the seller giving the buyer “a few more days” to come up with the money. This is dangerous because now there is no deadline. If the seller allows the funding date to be extended indefinitely, how can he ever cancel the escrow? The solution here is to always have a written agreement extending the COE to a definitive date in the future. If for some reason the seller has allowed the COE date to become open-ended, before canceling the agreement, the seller and buyer should sign an amendment to the escrow instructions agreeing upon a definite COE date in the future and providing that the purchase agreement will automatically terminate if the buyer fails to fund by that date. Only in this way can the seller insure (to the maximum extent possible) that he won't be sued for specific performance.

Of course, when a seller finds himself in this position, it is not uncommon for a real estate agent to be drug into the lawsuit. Therefore, agents need to be wary. Don't let your clients sign anything until you have a finalized contract. If your seller has already signed one contract, make sure it is cancelled and terminated before he signs another. If the buyer has not performed, take definitive steps to cancel the agreement--hopefully getting the buyer's signature. On behalf of the seller, do everything you can to avoid the specific performance lawsuit.

Albert G. Marquis is an attorney with the Las Vegas law firm of Marquis & Aurbach, counsel for GLVAR. He can be reached at (702) 382-0711 or visit the firm's web site at www marquisaurbach.com