How not to pay for that new home.

LEE’S SUMMIT, MO–Sanctum, LLC was developer of the “Siena at Longview” subdivision in this suburb of Kansas City.

In June 2002, Ivan and Marie Johnson entered into a construction contract with Sanctum for a new home to be built on Lot 7B in the Siena subdivision. The price would be $317,600, with the understanding the Johnsons would upgrade cabinetry, lighting and fixtures at their own expense, and receive credit for upgrades against the sale price at closing. Move-in was scheduled for November 2002. This would be their “retirement home.”

Lot 7B: A trap for the unwary

At the time the contract was made, Sanctum had construction loans from Gold Bank–secured by deeds of trust against the subdivision–for infrastructure and other improvements.

As provided by the contract, at signing the Johnsons paid Sanctum an earnest money deposit of $1,000, plus an additional $62,720 sixty days later.

Planning to move, the Johnsons sold their old home and moved into an apartment. They put most of their possessions in storage.

As work on the home proceeded the Johnsons advanced $57,517 for upgraded materials and labor.

November came, but the home was not ready. Each month thereafter Sanctum gave the Johnsons a new move-in date. Finally, in February 2004, the interior was ready and Sanctum scheduled a closing for March. The Johnsons were told they could move in on the first of April.

But as the closing date approached, Sanctum announced a new problem. It was, perhaps, “the problem” all along. Sanctum, it seemed, could not get its lender, Gold Bank, to release the property from construction deeds of trust without payment of an amount Sanctum didn’t have at hand. Sanctum hoped to have new investors, but wouldn’t be able to close until the investors were lined up and provided funding.

The Johnsons were allowed to move in, but there was no closing and they didn’t have a deed to the property. That, they hoped, would come.

Instead, by July 2004 Gold Bank put the subdivision into foreclosure. The foreclosure sale was held August 17. The Johnsons attended the sale, but couldn’t bid on Lot 7B because the subdivision was offered as a whole for $3 to 4 million.

By now the Johnsons had hired a lawyer, and they began heroic efforts to save their investment.

The Jackson County Courthouse at Kansas City, Missouri

First, they recorded a “Notice of Equitable Lien” against Lot 7B. Later, they filed a lawsuit and recorded a “Notice of Mechanic’s Lien.”

There were other mechanics’ lien claims against the subdivision, and other lawsuits, and the cases were consolidated for trial.

The trial court ruled against the Johnsons, and they appealed.

The Court of Appeals ruled the Johnsons were simply out of luck. Even though they had paid for substantial improvements, the court held they were not “eligible” to enforce a mechanic’s lien claim because the contract with Sanctum, coupled with their payments, made them “equitable owners” of the property. The court explained Missouri law provides mechanics’ lien rights for contractors and material suppliers, but not an “owner.”

As for their equitable lien claim, the court said the claim had merit and “the Johnsons did, in fact, have a legally recognizable vendee’s lien against the property in the total amount of $121,237.86.” But their lien was created after the Gold Bank deeds of trust were recorded and, the court said, it was wiped out by the foreclosure.

In closing, the court said: “This is not a result that sits well with the Court, but it is a result that is required by the law….”

Moral: The Johnsons should not have paid Sanctum or the upgraders before they had clear title to the property. That means a deed, of record, not subject to prior deeds of trust.

The earnest money should have been put in escrow, and not paid out until the buyers could get clear title.

“Unto an evil counsellor, close heart and ear and eye; And take a lesson from this tale, of the Spider and the Fly.” (Mary Howitt, The Spider and the Fly, 1829.)

The case is reported as First Banc Real Estate, Inc. v. Johnson, 321 S.W.3d 322 (Mo. App. W.D. 2010).