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Arizona Real Estate Law
by Christopher A. Combs
The following is for informational purposes
only and is not intended as definitive legal or tax advice. You
should not act upon this information without seeking independent
legal counsel. If you desire legal, tax or other professional advice,
please contact your attorney, tax advisor or other professional
consultant.
"Poor Man's Lis Pendens" Must be Removed Prior to Sale of Property to New Buyer
Question: After we signed a contract to sell our Surprise home, the buyer became very “flaky.” He never even did a home inspection. We think that the buyer was simply trying to “flip” the property to another buyer to make a profit. When the buyer did not close the transaction on the scheduled closing date, we cancelled the contract by notifying the title company. Two weeks later we signed a contract to sell our home to a second buyer. This transaction was scheduled to close last Friday. The title company contacted us, however, and said that they would not be able to close the transaction because the original buyer had recorded a copy of the purchase contract. When I angrily said that the original buyer had no right to record the purchase contract, the title company said that upon advice of their legal department there was a “cloud” on title, and that they would not close the transaction with the second buyer. Am I crazy, or is the title company crazy?
Answer:At the time of the execution of the purchase contract, any buyer acquires an equitable interest in the property. The seller retains the legal interest in the property until the closing, and at the time of closing the buyer, with the deed from the seller, acquires the legal interest in the property. At the time of the execution of the purchase contract the buyer can sell this equitable interest in the property unless the purchase contract prohibits assignment of the purchase contract. Similarly, this purchase contract can be recorded unless the purchase contract prohibits recording. In your situation the recording of the purchase contract even after the scheduled closing date could be a "cloud" on title if the cancellation was not proper. The legal department of the title company is simply saying that they do not know if the cancellation of the purchase contract was proper. Therefore, if you cannot find a title company that will make a determination that the cancellation was proper and close the second transaction, despite the recording of the purchase contract for the first transaction, you will have to contact a lawyer to remove this "cloud" on title. Note: The recording of a purchase contract is commonly known as a "poor man's lis pendens." In other words, the recording of the purchase contract may have the same effect as the recording of a lis pendens (Latin for "pending litigation") without the time and expense of the recording of a lis pendens, which requires a lawsuit for specific performance.
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