Specific performance of real estate contracts: legal blackmail.

• Author: Richman, Gerald F.
• Position: Florida

Beware real property owners: The mere filing of a suit for specific performance (regardless of its ultimate success or the merits) can potentially tie up your property for several years, with or without the existence of a lis pendens. The reason is simple. It is virtually impossible to obtain title insurance necessary to convey title while an action for specific performance is pending. In effect, this can be a form of "legal blackmail."

Because the law treats each parcel of real property as unique, often a claim for damages for breach of a real estate contract is not practical. Thus, the law allows an aggrieved party to file a claim for specific performance, which requests the court to order the party breaching the contract to perform its obligations under that contract. Although both buyer and seller retain the power to bring a specific performance claim if one believes the other to be in breach of the purchase and sale contract, the buyer has the power to tie up the seller's property because, in most cases, the seller cannot sell the property once the buyer files a claim for specific performance. This power has the practical effect of allowing the buyer to use the legal system to "blackmail" the seller into either conveying title to the property at a price agreeable to the buyer, or forcing the seller to pay off the buyer to drop buyer's claim and allow the seller to convey the property to a third party.

This article discusses the legal and practical problems with representing a seller of property confronted with the possibility of being effectively "blackmailed" into settling frivolous claims for breach of a real estate sales contract. We propose that the legislature enact law to protect sellers, which also balances the buyer's right to access to courts.

Illustrations of Legal Blackmail at Work

Two recent unreported trial court decisions illustrate the point that a specific performance lawsuit can result in legal blackmail.

In one case, the buyer and seller entered into a purchase and sale contract for an unimproved parcel of property to be purchased in four phases for $12,000,000. Under contract, the buyer had the right to extend the closing date for three 30-day periods by paying a $25,000 "extension fee" by a specified date for each extension. The buyer obtained two extensions and paid the $25,000 extension fee.

With regard to the final extension, the buyer informed the seller of its intent to seek an extension and make the required payment. On the date of the scheduled closing, with no extension having been granted, the buyer informed the seller that it did not have the money and stated that it was "all over." Later that day the buyer surprisingly informed the seller by fax that the "check is in the mail." The buyer never sent the extension fee. After waiting three days for the check that never arrived, the seller relied on the time is of the essence clause, defaulted the buyer, and terminated the contract.

The buyer subsequently filed a suit for specific performance and placed a lis pendens on the property. On a motion to dissolve the lis pendens, the court ruled that the initial pleading did not show that the action was "founded on a duly recorded instrument" as required by statute to maintain the lis pendens, and that a bond would be required.[1] The court dissolved the lis pendens after the buyer advised the court that it had no intention of posting a bond. The seller, nonetheless, could not obtain title insurance to sell the property to a third party until the lawsuit was over. The absence of a lis pendens was thus irrelevant.

In response to the seller's motion for summary judgment, the buyer claimed that the seller's patterns of accepting late payments, albeit as an accommodation to the buyer, created a waiver of the "time is of the essence" clause.[2] The court ruled that factual issues existed and denied seller's motion for summary judgment.[3] During a 12-day bench trial that was concluded more than a year and a half later, the seller established that a representative of the buyer had threatened to "tie the property up for three years" if the seller would not withdraw its default. The trial court found in an extensive opinion that the buyer's president had repeatedly lied to the seller and others; that there was no waiver; that the buyer was never ready, willing, and able to close; and that there was no equitable basis for the relief sought by the buyer. While the trial court thus ultimately ruled in favor of the seller, the property was, in fact, tied up for almost two years, and, had the appellate process run its full course, could have been tied up for as long as two to three years or longer. This is not an atypical situation.

As one might expect, the buyer was a shell corporation with a substantial amount of debts and little in the way of assets. The buyer, as was established at trial, had not been able to obtain financing and could not possibly have closed. While the buyer had little to lose other than its own expense of litigation, the seller was burdened with the risk of the downturn of the market, the costs of litigation, the carrying costs of the property including substantial real estate taxes, and was left only with the prospect of obtaining a judgment for real estate taxes, attorneys' fees, costs, and possibly slander of title or malicious prosecution, which would be wholly uncollectible unless the seller was able to pierce the corporate veil. "Legal blackmail" was a...