As a buyer, what happens when you find the perfect house, on the perfect street and enter into a contract of sale.
Then, when you try to perform your obligations under the contract, the seller stands in your way. Then, after you file a Lis Pendens (Notice of Pendency) and commence litigation to force the seller to sell you the property (also known as specific performance), you learn there was another buyer who preceded you and also did not close. What are your rights and remedies?
Over the last several years the real estate market has had its share of ups and downs. It was not so long ago that several offers above the asking price would be placed on a single parcel of property. Today, although the real estate market is not as “hot” as it once was, sales of real estate are on the climb again, and with that there are always issues that may arise.
Although one would generally assume the adage, “first in time equals first in right,” that is not necessarily the case. First, the question to ask when there are multiple purchasers is whether, as the second purchaser, you are a bona fide purchaser.
A bona fide purchaser is a purchaser who purchases property for value innocent of any circumstance that would bear upon the seller’s right to sell the property. Therefore, if you are the purchaser of a parcel of property without having any knowledge that another buyer already purchased the land, then you are a bona fide purchaser. If, however, you are somehow aware of any prior contracts of sale, you are deemed to have knowledge and will no longer be entitled to hold the title of bona fide purchaser.
How does a buyer establish they are a bona fide purchaser? When a buyer purchases property, he must record his deed to the property at the clerk’s office of the county where the property is located. If a buyer fails to record the deed and a subsequent purchaser purchases the same parcel, the second purchaser is a bona fide purchaser and will have preference over the initial purchaser because the second purchaser did not have knowledge of the earlier conveyance, so long as the second purchaser records their deed prior to the first purchaser.
The principles of a bona fide purchaser are not that different when there is one seller, multiple purchasers each holding a contract of sale.
RPL Section 294(1) provides, “An executory contract for the sale, purchase or exchange of real property, or an instrument canceling such a contract, or an instrument containing a power to convey real property, as the agent or attorney for the owner of the property, acknowledged or proved, and certified, in the manner to entitle a conveyance to be recorded, may be recorded in the office of the recording officer…”
If there has not yet been a closing, RPL Section 294(1) permits a purchaser to record their contract of sale. By recording the contract of sale, the purchaser is placing everyone on notice of their interest in purchasing the property. If there are multiple purchasers, the first purchaser to record their contract of sale will have rights superior to any other potential purchaser, regardless of whether a down payment has been paid to the seller.
Once a purchaser has recorded the contract of sale with the clerk’s office in the county in which the property is located, they may then pursue their rights of specific performance under the contract. Commonly in land sale contracts, there is language that allows a party to demand specific performance of the other party. Specific performance allows a person to demand the other party to perform under the contract rather than to seek money damages. Avila v. Arsada, 34 A.D.3d 609; citing Varon v. Annino, 170 A.D.2d 445, 446; LaMarche v. Rosenblum, 50 A.D.2d 636, 637. When a purchaser sues a seller for specific performance, the seller cannot claim as an affirmative defense that the purchaser is not ready, willing and able to close. Courts have determined that when a seller fails to adhere to their obligations under a contract of sale, their actions are deemed to be an anticipatory breach of the contract which waives the buyer’s obligation to perform under the contract. Gjonaj v. Sines, 69 A.D.3d 1188. The purchaser’s lack of performance under the contract (i.e. inability to close which arose from seller’s breach) does not prevent the purchaser from exercising their right to obtain specific performance from the seller.
While this remedy, in theory, appears relatively simple and straightforward, there can be complications. In order to record a contract of sale, the contract must be executed by both parties before a notary public. Common practice is such that people rarely if ever execute a contract of sale before a notary public. Without a notarized contract of sale, a purchaser trying to force the seller to sell the property may end up unsuccessful.
Another remedy, which can be instead of specific performance or in addition to specific performance, is damages. It is well settled that a purchaser, if they can establish the seller has willfully or deliberately failed to perform under the contract of sale, can obtain loss of the bargain damages, which are above and beyond the nominal damages specified in the contract of sale. Janoff v. Sheepshead Towers, Inc., 22 A.D.2d 950; Mokar Props v. Hall, 6 A.D.2d 536.
Therefore, the adage “buyer beware” may hold true in many situations, in certain circumstances, the seller, particularly as it relates to real property, may be forced to sell property under the specific performance clause in the contract of sale.
— by Elisa S. Rosenthal, Esq.
Law Office of Richard A. Klass
Copyright 2013 Richard A. Klass, Esq.