Nope, You Probably Don’t Get to File a Lis Pendens Over a Mere Deposit Dispute

It is not uncommon on the PAR Legal Hotline to be asked a question about filing a lis pendens after a deal falls apart. This question is often asked in the context of there being a dispute over the deposit. In most instances, the ability to file a lis pendens does not exist when the dispute is only over a deposit.

To start with, a lis pendens is a filing only providing notice that a lawsuit involving a dispute over ownership to real estate is being litigated. The only purpose of a lis pendens is to provide notice of the existing lawsuit and nothing more. Thus, a lis pendens itself is not a standalone lawsuit.

To help ensure there is appropriate notice, a lis pendens can be filed or indexed with both the prothonotary and the recorder of deeds offices in the county where the real estate is located. Filing the lis pendens in both offices increases the chances that a title search will discover the litigation if the owner tries to sell the real estate before the litigation ends.

The two most common instances for filing a lis pendens are when there is litigation requesting specific performance to sell the real estate or when a party is seeking to quiet title. Once a lis pendens is filed against the real estate, anyone purchasing the real estate while the lis pendens remains in place does so subject to the outcome of the litigation. So contrary to what many people believe, a lis pendens in and of itself does not stop a seller from selling the real estate.

However, the practical effect is that an owner will generally not be able to sell the real estate while a lis pendens remains in place because of the cloud on the title coming from the lis pendens. Due to the clouded title, title insurers will generally refuse to issue title insurance and lenders are unlikely to approve a loan on the real estate.

On the hotline, most Realtors^® inquiring about lis pendens are asking about it after an Agreement of Sale is terminated, whether properly or not, and there is an ongoing deposit dispute. Simply put, deposit disputes do not involve a question about ownership of the real estate. The dispute is merely about the deposit money, a question completely separate from a dispute over ownership of the real estate. Because a deposit dispute does not touch on ownership issues, a seller is able to immediately relist and sell the real estate after an agreement of sale is terminated even though a dispute over the prior deposit remains unresolved.

Even when litigation ensues and a lis pendens is filed against the real estate, there is no inherent right to maintain a lis pendens. A court can remove the lis pendens in certain circumstances, including when the dispute does not involve ownership to the real estate or when the court determines it would not be fair to tie up the real estate while the litigation continues.

At no time should a Realtor^® try to guide a client on the appropriateness or the actual filing of a lis pendens. When clients ask about or you believe a lis pendens could be an option, the only course of action you should take is to refer clients to an attorney to evaluate the situation and appropriately guide the clients. Not only could a Realtor^® improperly guiding a client on a lis pendens create potential liability for the Realtor^®, wrongfully using a lis pendens has its own legal consequences.