The process of real estate transactions can be complicated, often involving legal instruments unfamiliar to many buyers. Title insurance companies play a crucial role in protecting buyers from unforeseen claims against a property. A key document that may appear during the due diligence phase is a Certificate of Pending Litigation (CPL). Legal counsel should always be consulted. But what is a certificate of pending litigation, and why should it be considered a red flag for home buyers? This article explores the meaning and implications of a CPL within the context of a property purchase.
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Certificate of Pending Litigation: A Home Buyer’s Red Flag?
Navigating the complexities of a real estate transaction involves careful review of property titles and legal documents. One of the most significant items that can appear during this process is a Certificate of Pending Litigation. Understanding what this certificate is, why it exists, and how it impacts your potential purchase is crucial for any prospective home buyer.
What Is a Certificate of Pending Litigation?
A Certificate of Pending Litigation (CPL), known in some jurisdictions as a lis pendens, is an official notice registered on a property’s title at the Land Title Office. Its purpose is to inform the public, including potential buyers and lenders, that the property is currently the subject of a court case.
In simple terms, a CPL acts as a formal warning sign. It signals that a third party has a legal claim against the property and that the outcome of the lawsuit could change the property’s ownership or a person’s rights to it.
The Core Purpose of a CPL
The primary function of a Certificate of Pending Litigation is to preserve the status quo during a legal dispute. It prevents the current property owner from selling or mortgaging the property with a "clean" title while the court case is ongoing. By registering a CPL, the person who initiated the lawsuit (the plaintiff) ensures that any future owner or lender will be bound by the court’s final decision.
How a CPL Affects a Potential Home Buyer
Discovering a CPL on the title of a property you intend to buy is a serious matter that introduces significant risks and complications.
- Risk to Ownership: The most substantial risk is that the person suing the current owner could win their case. If the court rules in their favor, you could lose the property you just purchased, or your ownership could be subject to their legal rights.
- Financing Difficulties: Most mortgage lenders will refuse to provide financing for a property with a CPL on its title. The CPL creates an "encumbrance" or a "cloud on title," making the property poor collateral for a loan until the legal matter is resolved.
- Transaction Delays and Costs: The presence of a CPL will halt the transaction. Resolving the underlying lawsuit can take months or even years, leading to indefinite delays. You may also incur additional legal fees to have your lawyer investigate the claim and advise you on the potential risks.
Common Legal Disputes That Lead to a CPL
A CPL can arise from various types of legal disagreements concerning real property. The table below outlines some common scenarios.
| Type of Dispute | Brief Explanation |
|---|---|
| Ownership or Interest Claims | This often occurs during a divorce where spouses dispute ownership of the family home, or in inheritance disputes where a family member claims they have a right to the property. |
| Failed Purchase Agreements | A previous potential buyer might sue the seller for breach of contract (e.g., the seller backing out of a signed deal) and file a CPL to prevent the seller from selling to someone else. |
| Foreclosure Proceedings | A lender will typically file a CPL when initiating foreclosure action against a homeowner who has defaulted on their mortgage payments. |
| Builder’s Liens or Contractor Disputes | A contractor or supplier who has not been paid for work done on the property may sue to enforce a builder’s lien and file a CPL to secure their claim against the property’s title. |
| Fraudulent Conveyance Claims | A creditor may claim that the property was transferred to someone else (like a family member) specifically to avoid paying a debt. The creditor would file a CPL to challenge the transfer. |
How to Discover if a Property Has a CPL
You will typically find out about a CPL during the due diligence phase of your home purchase, specifically through the title search process.
The Role of a Title Search
When you make an offer on a home, your real estate lawyer or notary public will conduct a title search. This is a thorough examination of the historical records related to the property, which are kept at the regional Land Title Office. This search will reveal the current registered owner, any mortgages, easements, restrictive covenants, and, importantly, any CPLs registered against the property.
Reviewing the Preliminary Title Report
The findings of the title search are compiled into a preliminary title report. It is essential to review this document carefully with your legal representative. They will be able to identify a CPL and explain the initial details of the registered court action.
Steps to Take if You Find a CPL on a Property
Discovering a CPL does not automatically mean the deal is over, but it requires immediate and careful action.
- Consult Your Real Estate Lawyer Immediately: This is the most critical step. Do not rely on advice from the seller or their agent. Your lawyer is your advocate and will provide an objective assessment of the situation and the level of risk involved.
- Investigate the Underlying Lawsuit: Your lawyer will obtain a copy of the court documents related to the CPL. This will provide details on who is suing whom and the legal basis for their claim. Understanding the nature of the dispute is key to evaluating the risk.
- Assess the Legitimacy of the Claim: With legal guidance, you need to determine the potential outcome of the lawsuit. Is the claim strong or weak? How likely is the plaintiff to succeed? This assessment will inform your next move.
Evaluating Your Options
Based on your lawyer’s advice and your personal risk tolerance, you will generally have three options:
- Withdraw Your Offer: In most cases, this is the safest and most recommended course of action. The uncertainties and potential for financial loss are often too great to proceed. You can usually withdraw your offer without penalty if your purchase agreement includes a "subject to title search" condition.
- Negotiate Conditional Terms: It may be possible to negotiate an agreement where the seller is responsible for getting the CPL removed before the closing date. However, this can be difficult as the seller has limited control over court timelines.
- Wait for Resolution: If you are not in a hurry and are very committed to the property, you could potentially wait for the lawsuit to be resolved. This is a high-risk strategy, as there is no guarantee of when—or how—the case will end.
How a Certificate of Pending Litigation Is Removed
A CPL is not permanent, but its removal is tied directly to the court case it represents. It can be removed from a property’s title in one of two primary ways:
- Resolution of the Lawsuit: The CPL will be removed once the legal dispute is formally concluded. This can happen when the plaintiff voluntarily withdraws the lawsuit, the parties reach a settlement, or a judge delivers a final verdict and the case is dismissed.
- Court Order: In some instances, the property owner (the defendant in the lawsuit) can apply to the court to have the CPL removed. A judge may grant this if the claim is shown to be frivolous, if the defendant posts a security deposit with the court in place of the CPL, or if the lawsuit is not being pursued diligently.
Certificate of Pending Litigation: Buyer FAQs
This FAQ clarifies key questions about Certificates of Pending Litigation (CPLs) and their implications for home buyers.
What exactly is a certificate of pending litigation?
A certificate of pending litigation, often called a lis pendens, is a legal notice registered on the title of a property. It informs potential buyers that the property is subject to a lawsuit. This lawsuit could affect the ownership or use of the property.
Why should a home buyer be concerned about a CPL?
A CPL serves as a warning. It signals an active legal dispute concerning the property’s title or a claim against the property. Buying a property with a CPL means you could inherit the legal problem.
How does a CPL affect the sale of a property?
The existence of a certificate of pending litigation complicates and often stalls the sale of a property. Most lenders will refuse to finance a property with a CPL until the litigation is resolved or the CPL is removed. This makes it difficult to find a buyer.
What should a buyer do if they discover a CPL on a property they want to buy?
First, consult with a real estate lawyer. They can investigate the underlying lawsuit. They can advise you on the risks involved and potential strategies. Understand the implications of buying a property subject to a certificate of pending litigation before proceeding.
So, there you have it—a clearer picture of what is a certificate of pending litigation. If you’re navigating the world of real estate and come across one of these, don’t panic, but definitely pay attention and get some expert advice!
