IMPACT OF LIS PENDENS ON UNRECORDED INTERESTS / LIENS

Posted on August 27, 2016August 27, 2016 by Edward Garber

In a previous article, I discussed the importance of recording a lis pendens in a construction lien foreclosure action.

There is another noteworthy point relating to the impact of lis pendens that can provide quite a bit of consternation.

Florida Statute 48.23(1)(d) provides:

Except for the interest of persons in possession or easements of use, the recording of such notice of lis pendens, provided that during the pendency of the proceeding it has not expired pursuant to subsection (2) or been withdrawn or discharged, constitutes a bar to the enforcement against the property described in the notice of all interests and liens, including, but not limited to, federal tax liens and levies, unrecorded at the time of recording the notice unless the holder of any such unrecorded interest or lien intervenes in such proceedings within 30 days after the recording of the notice. 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 the notice, the property shall be forever discharged from all such unrecorded interests and liens. If the notice of lis pendens expires or is withdrawn or discharged, the expiration, withdrawal, or discharge of the notice does not affect the validity of any unrecorded interest or lien.

The language in this statute requires persons with unrecorded interests / liens to intervene in a lawsuit subject to a lis pendens within 30 days or else they are barred from proceeding against the property (unless the property subject to the lis pendens is not foreclosed on or the lis pendens is discharged). This is a harsh outcome because such a person’s (unrecorded) interest may not accrue until it is already too late—beyond the 30 days of the recording of the lis pendens.

The best way to explain the potentially harsh application of this statute is to examine its application in a few cases.

In Adhin v. First Horizon Home Loans, 44 So.3d 1245 (Fla. 5^th DCA 2010), a lender recorded mortgages associated with a construction loan. The borrower entered into an agreement to sell parcels and any homes currently built on the parcels. The parcels were sold, however, the closing agent failed to record the deeds and mortgages associated with the closing, and failed to secure any release from the construction lender as to the parcels that had been sold. Subsequently, the construction lender foreclosed on its mortgage which included a foreclosure that applied to the parcels that had been sold. A lis pendens had been recorded. Approximately two months after the lis pendens was recorded, the purchasers of the parcels recorded their deeds and corresponding mortgages and moved to intervene in the construction lender’s foreclosure lawsuit. The construction lender opposed the motion to intervene arguing that the purchasers of the parcels failed to timely intervene pursuant to s. 48.23(1)(d) since the lender’s foreclosure action impacted their rights to the parcels they purchased. The appellate court agreed with the lender finding that the language operates as a nonclaim statute that bars enforcement against the property by a holder of an unrecorded interest (such as the purchasers of the parcels in this case) after the prescribed statutory period (30 days), provided the litigation proceeds to a final judgment and judicial sale of the foreclosed property. This meant the purchasers of the parcels could not intervene and their rights as it related to their parcels were entirely dependent on whether the construction lender’s foreclosure action proceeded to a final foreclosure judgment and judicial sale of the property (inclusive of their property). Ouch!!!

In Jallali v. Knightsbridge Village Homeowners Ass’n, Inc., 2016 WL 3548843 (Fla. 4^th DCA 2016), a homeowner’s lender filed a mortgage foreclosure action and recorded a lis pendens. While the mortgage foreclosure action was pending, the homeowner’s association recorded a lien for unpaid assessments and moved to foreclose its assessment lien. The issue was whether the lender’s notice of lis pendens barred the homeowner’s association’s subsequent foreclosure action based on its lien for unpaid assessments. The appellate court held it did not because the lien was based on a recorded Declaration of Covenants that was recorded prior to the filing of the lis pendens—thus, s. 48.23(1)(d) did not apply because the Declaration was an interest recoded prior to the lis pendens.

In Ober v. Town of Lauderdale-by-the-Sea, 2016 WL 4468134 (Fla. 4^th DCA 2016), a lender filed a foreclosure action and recorded a lis pendens. The lender obtained a final judgment in foreclosure. Subsequent to the final judgment in foreclosure, but before any foreclosure sale, the Town of Lauderdale-by-the-Sea recorded liens against the property for code violations that occurred post-final judgment. The property was sold at a foreclosure sale and the new owner filed suit to quiet title and remove the Town’s liens. The appellate court held that s. 48.23(1)(d) does not operate to bar liens that accrue and are recorded AFTER the final judgment. Hence, recording a lis pendens does not operate to bar liens that occur (accrue) and are recorded post-final judgment but before a foreclosure sale.

When it comes to construction projects, sometimes there are multiple construction lien foreclosure actions relating to the same property. All of these foreclosure actions are routinely accompanied by a lis pendens. Some of these actions could arguably be barred under s. 48.23 since they may be based on liens recorded outside of the 30-day window of the first lis pendens that was recorded. So, if the initial foreclosure action results in a judicial sale of the property, the subsequently recorded liens on the property whose holder’s failed to timely intervene may be out of luck – they would not be able to foreclose on the same property that was already sold at a judicial sale. On the other hand, under Jallali, liens relate to a notice of commencement, and similar to a Declaration of Covenants (or Condominium), could be considered a recorded interest. The notice of commencement would be recorded prior to any construction lien, meaning that any construction lien is not based on an unrecorded interest at the time a lis pendens is recorded. If this is true, than s. 48.23(1)(d) arguably would not apply to bar any liens that accrue and/or are recorded after 30 days from the initial lis pendens. To preserve this argument, it is important that liens are recorded within the effective period of a notice of commencement so that the liens can relate back to the date the notice of commencement is recorded.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

LIS PENDENS – RECORDATION AND DISSOLUTION

Posted on July 24, 2016July 24, 2016 by Edward Garber

When you file a construction lien foreclosure lawsuit, you must also record a lis pendens in the official (public) records against the property. This lis pendens serves as written notice that there is a lawsuit concerning the real property, and more specifically, title relating to that real property. If the property is then sold or rented, the buyer or tenant will ultimately be bound by a final determination relating to the lawsuit concerning title to the property. This is the value in recording a lis pendens and why it is a MUST in any foreclosure lawsuit. (This is the same value in any mortgage foreclosure lawsuit and why lis pendens are recorded in these lawsuits too.) A lis pendens will show up in a title report. In most instances, title companies will not issue a title policy if there is a lis pendens or may require a certain amount of money escrowed as a result of the lis pendens and pending action in order to issue a title policy. Also, a buyer, in particular, and a tenant are not going to want to invest in property where the title to that property is at-issue in a lawsuit. Hence, the lis pendens impacts the sale and potential re-financing of the property.

With respect to the dissolution of a lis pendens, Florida Statute s. 48.23(3) provides:

When the pending pleading does not show that the action is founded on a duly recorded instrument [e.g., mortgage or Declaration of Condominium] or on a [construction] lien claimed under part I of chapter 713 or when the action no longer affects the subject property, the court shall control and discharge the recorded notice of lis pendens as the court would grant and dissolve injunctions.

Therefore, if the lawsuit (i) does not affect title to the real property, (ii) is not based on a construction lien, or (iii) is not based on a duly recorded instrument, such as a mortgage, an owner of real property is going to move to dissolve the lis pendens so that title to their property is not impacted by the lis pendens. This is, at least, what an owner should do.

What happens if a lis pendens is recorded but the lawsuit is not a construction lien foreclosure lawsuit or founded on a duly recorded instrument such as a mortgage?

For example, what if there is a lawsuit for the specific performance of a purchase-sale contract involving real property? In this instance, the party suing for the specific performance of the real property to be sold to it will want to record a lis pendens to put the public on notice that there is an action concerning title to that property. But, this type of lawsuit is not founded on a duly recorded instrument or construction lien. For this reason, the owner of the property will move to dissolve the lis pendens so that they can sell the property or re-finance the property, as the case may be.

A recent decision in Regents Park Investments, LLC v. Bankers Lending Services, Inc., 41 Fla.L.Weekly D1688c (Fla. 3d DCA 2016), exemplifies the scenario of a lis pendens being recorded in a dispute concerning the sale of real property and the owner of the property moving to dissolve the lis pendens. The buyer filed a lawsuit for specific performance to force the owner to sell the property to it. The buyer also recorded a lis pendens (as the buyer did not want the owner to sell the property to another buyer). The owner moved to dissolve the lis pendens so that it could do what it wanted with the property without the impact of the lis pendens.

The Third District explained that the burden was on the proponent of the lis pendens—the buyer that sued for specific performance that recorded the lis pendens—to establish a fair nexus between the claim asserted in the lawsuit and the real property’s title. Regents Park Investments, quoting Nu-Vision, LLC v. Corporate Convenience, Inc., 965 So.2d 232, 234-36 (Fla. 5^th DCA 2007). This fair nexus means the proponent of the lis pendens must make a minimal evidentiary showing they have a good faith, viable claim in the lawsuit concerning the property’s title. Id.

The appellate court, based on this minimal evidentiary showing of a fair nexus between the asserted claim and title the property, maintained:

Applying the standard of a minimal showing that there is at least some basis for the underlying claim and a good faith basis to allege facts that would at least state a viable claim, we conclude that Regents [buyer suing for specific performance that recorded lis pendens] met that standard. Regents’ showing that its claims arose out of a written contract for sale of the subject properties established a “fair nexus” to the properties and its Interrogatory answers swearing that it was ready, willing and able to close on the closing date, together with evidence that Bankers [owner] was not able to close because of the outstanding lot clearing liens against the property, provided a sufficient minimal basis to support either a claim that Regents could have performed or that its performance was excused. Consequently, we find that the trial court should not have discharged the lis pendens and reverse with instructions that it be reinstated.

This fair nexus standard requiring a minimal evidentiary showing provides an advantage to a buyer that sued for specific performance and recorded the lis pendens. It simply requires the buyer to proffer some evidence to support that they have a good faith, viable claim concerning title to the property. If the buyer cannot do this, the lis pendens should be dissolved. On the other hand, if a buyer supports this fair nexus standard, then the lis pendens will not be dissolved meaning the owner’s real property will continue to be impacted by the lis pendens. In such scenario, the owner may ask the court to require that the proponent of the lis pendens furnish a bond in the event it turns out that the buyer’s claim is not valid meaning the lis pendens was wrongfully recorded.