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.
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,
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,
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