BUYERS MAY NOT BE ABLE TO COLLECT ATTORNEYS’ FEES WHEN SUCCESSFULLY SUING FOR SPECIFIC PERFORMANCE
If a seller of real property reneges on a contract to sell, the buyer can sue for “Specific Performance.” This means that the buyer can ask the court to order the seller to convey the specific property that is the subject of the contract. The aggrieved buyer can elect this remedy because the failure to obtain title to a specific parcel of property may not be compensable with monetary damages.
In practice this remedy is almost always requested by aggrieved buyers because it allows them to record a lis pendens which clouds title to the property and makes it difficult for the defendant seller to sell or encumber the property until the litigation is resolved. This is exactly what the Plaintiffs did in the case of Behniwal v. Mixs, 147 Cal.App 4th 621 (2007). However, after the lis pendens was recorded, the defendant sellers were still able to obtain loans secured by the property. The sellers borrowed almost all of the equity with three loans, including one from World Savings. The lenders reasoned that even if the seller lost the litigation, the buyer would have to pay the agreed purchase price to obtain specific performance which was sufficient to pay the loans. In other words, by loaning after the recording of the lis pendens the lenders knew that their loans would be subject to a possible court order sale of the property but assumed that they would be paid from the proceeds.
Like most contracts for the sale of real property, the contract between the Behniwal’s and the Mix’s provided that if litigation was necessary to enforce it, the prevailing parties would be entitled to an award of their attorneys’ fees. Thus when the court found that the buyers were entitled to specific performance, it awarded them more than $250,000 in attorneys’ fees. Originally, the trial court said that the Behniwals could reduce their purchase price of $540,000 by this award. This would not have left enough cash to pay the loans secured by the property. With the house being sold to the Behniwals, the lenders would have lost their security. Since the Mix’s had few other assets from which to repay the loans, it was unlikely the loans would be repaid.
The Court of Appeal reversed holding that the award of attorneys’ fees cannot be used as a credit against the purchase price. The buyers would have to try to collect their attorneys’ fees after paying the full agreed price for the property. Again, as the Mix’s had no assets, the attorney fees were unlikely to be collected.
Buyers can try to protect themselves by making special provisions in the contract for sale. The court of appeal in Behniwal v. Mix said that the attorneys fee award was pursuant to an independent contractual provision and therefore was not incident to the judgment for specific performance. Accordingly, buyers need to specifically provide for an adjustment in the purchase price for any attorneys’ fees incurred enforcing the contract of sale. Only by tying the attorneys’ fees to the purchase price can a buyer be hopeful of collecting them should an insolvent seller renege on conveying property as agreed.
