Anthony A. Nozzolillo, Esq.
A Contract of Sale is executed. The Purchaser delivers a down payment, customarily ten percent (10%) of the purchase price, to be held in escrow. Weeks pass. There is no mortgage denial, no title defect, no failed inspection and no breach by the Seller of any kind. The Purchaser simply announces that he has changed his mind.
The Seller, as the Contract permits, elects to retain the down payment as liquidated damages. The Purchaser thereupon commences an action to recover that money — and files a Notice of Pendency against the premises, which has the practical effect of preventing the Seller from selling the home to anyone else while the lawsuit proceeds.
The question Sellers ask me, generally within a day of learning that a filing has appeared against their property, is whether the Purchaser is permitted to do that.
What a Notice of Pendency Actually Accomplishes:
A Notice of Pendency, still commonly called a Lis Pendens, is filed with the County Clerk and recorded against the property. Under CPLR §6501 the pendency of the action thereby becomes "constructive notice, from the time of filing of the notice only," and a person "whose conveyance or incumbrance is recorded after the filing of the notice is bound by all proceedings taken in the action after such filing to the same extent as a party."
Stated in practical terms: a purchaser who buys the home after that filing takes it subject to whatever the lawsuit ultimately decides, and a lender who lends against it lends on the same terms. No title insurance company will insure around it. The home is, for all commercial purposes, off the market until the matter is resolved.
What makes this remedy formidable is that no judge grants it. The filing is made by the attorney who commenced the action, without leave of court and without any judicial officer first examining whether the claim has merit. The burden of undoing it falls entirely upon the property owner.
The Statute Permits It Only in a Narrow Class of Cases:
That power is confined by the statute which creates it. CPLR §6501 allows the filing only in an action "in which the judgment demanded would affect the title to, incumbrance of, or the possession, use or enjoyment of, real property."
Two (2) of those words are recent. "Incumbrance of" was added by Chapter 630 of the Laws of 2023, the act passed to address deed theft, signed on 14 November 2023 and effective thirty (30) days thereafter. That same act created new subdivisions permitting a District Attorney's office or the Attorney General to file a Notice of Pendency upon probable cause that a crime affecting real property has occurred. The added words, however, were placed in the general provision which every private litigant uses, and the Second Department, writing in May of 2024, quoted the section in its earlier form.
Every word of it is doing work. An action seeking money is an action seeking money. A judgment directing one party to pay another a sum of dollars decides nothing whatever about who owns the house, who may occupy it, or what may be done with it.
What the Appellate Division Held in 2024:
The Second Department addressed precisely this in Mallek v Felmine, decided 22 May 2024. The plaintiffs had commenced an action to recover a down payment made pursuant to a contract for the sale of real property and had filed a Notice of Pendency. The Supreme Court, Kings County, declined to cancel it.
The Appellate Division reversed. On a motion to cancel, the court's review "is to be limited to the pleading's face," and "it neither assesses the likelihood of success on the merits nor considers material beyond the pleading itself." Applying that standard, the Court found that "the complaint, on its face, only asserts causes of action to recover monetary damages" and "does not seek relief that would affect the title to, or the possession, use, or enjoyment, of the property." The cross motion to cancel should have been granted.
The lesson for a Seller is a favorable one, and the lesson for a Purchaser's attorney is that the pleading is examined rather than the grievance.
The Distinction Which Governs, and an Attempt to Evade It:
Where a Seller refuses to convey and the Purchaser sues for specific performance — compelling the Seller to deliver the deed — the judgment demanded would plainly affect title, and a Notice of Pendency is proper. Where the Purchaser wants his money back, it is not. That is the distinction, and it accounts for most of these disputes.
It does not account for all of them. In Tilden Development Corp. v Nicaj, decided by the same Court in 2008, a purchaser sued to foreclose a vendee's lien and to recover its down payment and expenses, and filed a Notice of Pendency. The sellers moved to cancel it as an action for money only. The Appellate Division held that "since the action seeks to foreclose a vendee's lien, the Supreme Court erred in granting the sellers' motion to cancel the notice of pendency on the ground that this action is one for money only."
A vendee's lien is the equitable interest a purchaser is said to hold in the premises on account of the deposit he has paid. An action to foreclose such a lien asserts an interest in the property itself rather than a demand for dollars, and the Notice of Pendency survives on that footing. A lien is also, in terms, an incumbrance — which is the word the Legislature placed in §6501 in 2023.
That route, however, is closed by the Contract of Sale itself, and it is closed as a matter of first principle. The parties' agreement governs the arrangement between them as to what may be made a lien upon the premises, and the verbiage of the contract is given deference irrespective of what the common law rule would otherwise supply.
Paragraph 24 of the standard Residential Contract of Sale — jointly prepared by the Real Property Section of the New York State Bar Association, the New York State Land Title Association, and the real property committees of the Association of the Bar of the City of New York and the New York County Lawyers' Association — provides that all money paid on account of the contract, together with "the reasonable expenses of examination of title to the Premises and of any survey and survey inspection charges," "are hereby made liens on the Premises, but such liens shall not continue after default by Purchaser under this contract."
The final clause decides the question. The Purchaser's lien is a creature of the agreement he signed, and that agreement extinguishes it upon his own default. A Purchaser who walks away has, by the very act of walking away, terminated the interest upon which a Notice of Pendency might otherwise have rested.
Two (2) observations follow for the practitioner. The first is that this turns upon the form: a Contract of Sale which modifies paragraph 24, or which omits it, presents a different question, and that paragraph is worth reading before any position is taken. The second is that where title charges were in fact incurred — a title search and a survey, ordinarily a sum on the order of fifteen hundred dollars ($1,500.00) — a Seller who tenders them removes the subject of the argument altogether.
Why the Defaulting Purchaser Loses the Underlying Claim:
The Court of Appeals settled the substantive question in Maxton Builders, Inc. v Lo Galbo, 68 N.Y.2d 373 (1986). The purchasers there attempted to cancel under a contract rider, failed to deliver the required notice within the time allowed, and refused to close. The Court held: "For more than a century it has been well settled in this State that a vendee who defaults on a real estate contract without lawful excuse, cannot recover the down payment." The rule descends from Lawrence v Miller, decided in 1881.
The purchasers asked the Court to abandon that rule and limit the Seller to proven actual damages. The Court declined, and the Appellate Division below had put the matter plainly: upon a wilful default or a repudiation, the vendee may not recover the down payment "even though the vendor resells the premises for a sum equal to or greater than the contract price," and it is immaterial that the vendor may thereby be inequitably enriched.
The Court of Appeals added an observation which answers the complaint a defaulting Purchaser invariably makes. Where the retained sum is challenged as excessive, it is the buyer who "would bear the burden of proving that the amount retained exceeded the actual damages," and upon a down payment approximating ten percent (10%) that burden "is not likely to be met."
The standard form says as much in terms. Paragraph 23(a) provides that upon the Purchaser's default "Seller's sole remedy shall be to receive and retain the Downpayment as liquidated damages," and recites that the sum "constitutes a fair and reasonable amount of damages under the circumstances and is not a penalty."
What a Seller Does About It:
CPLR §6514 supplies the mechanism. Cancellation is mandatory in the circumstances set out in subdivision (a), among them where the action has been settled, discontinued or abated, and where service of the summons was not completed within the time allowed. Cancellation is discretionary under subdivision (b) "if the plaintiff has not commenced or prosecuted the action in good faith."
Subdivision (c) is the provision Sellers are least often told about: in an order cancelling a Notice of Pendency, the court "may direct the plaintiff to pay any costs and expenses occasioned by the filing and cancellation." A filing made to apply pressure is therefore capable of carrying a price.
CPLR §6515 affords a further route, permitting cancellation upon the moving party's undertaking where the court finds that adequate relief can be secured to the plaintiff in that manner.
In Summation:
A change of heart is not a lawful excuse. A Purchaser who walks away from a Contract of Sale for no reason cognizable at law forfeits a down payment of ten percent (10%) and will not recover it, and a lawsuit demanding its return supports no Notice of Pendency against the home.
What such a Purchaser retains is the ability to file one anyway, before any judge has looked at the claim, and the Seller's exposure lies in the interval between that filing and its cancellation. How the complaint is pleaded determines how quickly that interval closes. A Seller who receives notice of such a filing should place it in the hands of counsel within days rather than weeks, both because the cancellation motion is available immediately and because the costs and expenses occasioned by the filing are recoverable where the application is made.
Be sure to consult a seasoned attorney at the first indication that a Purchaser intends to walk away, and well before any filing is made against your property.
DISCLAIMER: THIS ARTICLE IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT TO BE RELIED UPON AS LEGAL ADVICE. NO ATTORNEY CLIENT RELATIONSHIP IS CREATED BY THIS PUBLICATION. AN INDEPENDENT LEGAL OPINION SHOULD BE OBTAINED BY THE READER.