Developers, Construction Lenders Nervous As Buyers Begin To Claim Equitable Liens, File Lis Pendens, Threaten Foreclosure To Force Return Of Deposits

In South Florida, the Daily Business Review reports on a tactic some disgruntled customers of condo developers are using to force a return of deposits paid on purchase contracts that have yet to close:

• [F]rustrated contract holders [...] have stepped up their fights against construction lenders, claiming they have an equitable interest in the properties where they planned to buy a condo. They are not necessarily interested in foreclosing on projects but hope the new strategy will persuade developers and construction lenders to return their deposits — or, at least, a portion of them.

• The strategy could be troubling for lenders and developers because a lis pendens casts a cloud over the property title. And banks looking to sell the notes and mortgages secured by the projects may have a hard time finding buyers as a result.

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• Several buyers have sued lenders claiming their deposits have seniority over the construction loan because their contracts were signed before the construction loan was obtained.(1) Often, developers had to line up contracts for at least half of a project’s units to secure a construction loan.(2) For that reason, some frustrated buyers are dragging construction lenders into their deposit recovery lawsuits.

For more, see Condo Meltdown: Latest strategy involves pursuing lenders.

For examples of two lawsuits in which disgruntled condo purchasers are, among other things, asserting equitable lien claims, and seeking foreclosure thereof, see:

• Duque, et al. v. W/K Sawgrass LLLP, et al. (count XIV - pages 40-41),
• Abercrombie, et al. v. SB Hotel Associates, LLC, et al. (count XII - page 33-34).

(1) The story quotes one local attorney involved in the deposit refund litigation as saying: “There is long-standing case law which holds that a buyer who pays money toward the purchase of a home receives an equitable interest in the property, and this interest can be legally superior to any interest in the property obtained by a construction lender[.]”

(2) Even if the construction lender recorded its mortgage in the county records before the contract holders recorded their interests, the contract holders' unrecorded interests (including any possible equitable liens a court may establish) could very well have priority over the recorded interest of the lender. The real estate recording statutes, which determine the priority of interests in property, only protect bona fide purchasers (buyers) and bona fide encumbrancers (lenders). If it can be shown that the lender either:

• had actual knowledge, or
• can be chargeable with notice

of the existence of the earlier purchase contracts, a case can be made defeating any claim/defense by the lender asserting bona fide purchaser/encumbrancer status, thereby making the construction loan inferior to the contract holders' equitable liens. See generally, Flanigan's Enters. v. Shoppes at 18th & Commer., Inc., 954 So. 2d 758; 2007 Fla. App. LEXIS 7065; 32 Fla. L. Weekly D 1241 (Fla. App. Ct., 4th Dist. 2007).

Inasmuch as the lender here required the developer to pre-sell half the units in the project before it would fund the loan, it may be tough for the lender to now say it had no knowledge of those existing contracts. I wonder if the purchase contracts contained a subordination clause making the purchasers' interests inferior to a future construction loan??? The story is silent on this point.