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The Unexpected "Vendee's Lien"

A vendee’s lien is an equitable lien created by the courts as a remedy to protect purchasers of real property when the seller cannot perform under the contract.

Stephen Aron Benson   Jim Samuelson  

Steve Benson

 

Jim Samuelson

 

A purchaser enters into a contract and makes a down payment to purchase real estate in a soon-to-be-built subdivision or condominium project. The project developer has yet to obtain a construction loan to build the project. The lender bank, when considering the loan, is aware (and perhaps has required) that the developer has unrecorded contracts and deposits for units in the project.

The bank decides to fund construction and records a deed of trust lien on the entire development. The bank obtains a title insurance policy showing the construction loan in first position on the project.

Thereafter, problems ensue, and the developer is unable to complete the project. The developer (seller) has broken its contract with the purchaser (who has paid money under the contract). The purchaser makes a demand upon the developer for return of its deposit and contract-required installment payments. The developer is unwilling or unable to return these funds.

Sounds like the purchaser is out of luck, right?

Actually, the purchaser may have a “vendee’s lien” that, although unrecorded, is superior to the recorded lien of the lender bank. As such, the purchaser (the vendee) can sue on its vendee’s lien to foreclose on the unit it had contracted to buy.

A vendee’s lien is an equitable lien created by the courts as a remedy to protect purchasers of real property when the seller cannot perform under the contract. The idea is that the purchaser becomes the equitable owner of the property and the seller (vendor) is a trustee of the property for the benefit of the purchaser. Vendee’s liens have long been recognized by courts in the United States, and Arizona has recognized that a purchaser who deposits money toward the purchase of real property has a vendee’s lien against the property to secure the repayment of the funds.

A very recent case decided by the Arizona Court of Appeals makes clear that unrecorded vendee’s liens are alive and well in Arizona. In Rigoli v. 44 Monroe Marketing LLC, the Court held that "a vendee's lien is superior to subsequent rights created in a person or entity with actual or inquiry notice." In Rigoli, the lender was aware of the use of the purchaser’s funds for construction and actually made such down payments a condition of funding its loan. The vendee's lien arose when the down payments were made under the contracts. The Court found that the lender bank had notice of the contracts and down payments, and that the bank’s recorded deed of trust was primed by the vendee’s lien (it is not yet known whether the bank will appeal the decision).

The existence of vendee’s liens should be a concern to lenders (and title companies), as these unrecorded liens can prime what otherwise appears to be a first position deed of trust. The purchaser of property under a contract should be aware that, under these circumstances, the purchaser may have become the equitable owner with priority to enforce their lien against the property.