Real Estate Dispute Contractual Mandatory Mediation & Arbitration

The excitement of signing those escrow papers for your new home; the great anticipation of moving in; the excitement with all of your plans to make your new home your castle. I have been there and I remember all of those emotions and expectations. It can be the most exhilarating and frightening experience in one’s life.

During my career as an attorney practicing real estate law and now as a mediator and arbitrator working on resolving many various real estate based conflicts, I have learned of how the excitement can turn to tragedy and sadness. One moves into the new home and it seems no matter how hard one tried to uncover potential issues or how complete the mandatory disclosures by the seller, problems become apparent that many claim would have discouraged them from buying the home. This also happens in new home purchases.

Angry and disappointed, buyers first call their real estate agent demanding that something be done. Typically, the agent will try to work things through with the buyer to see what can be done. Agents also may endeavor to contact the seller or seller’s agent to see if something can be done to resolve the issue. To a surprising degree such efforts succeed when both sides can work together to compromise. Unfortunately, in all too many instances, the informal negotiations fail, leaving the aggrieved party the “Sophie’s choice” of living with the perceived defects and correcting them or pursuing the seller (and sometimes the agent(s)) in litigation. The parties must carefully consider their alternatives, i.e., what course will bring them relief from the problem most efficiently and at the least cost?

When parties to a California real estate transaction shuffle through the many documents necessary, the buyer’s agent will ask them to sign a form called a Real Estate Purchase and Sale Agreement designed and prepared by the California Association of Realtors or a “C.A.R. Form.” On that form, the buyer will articulate an offer to be presented to the seller. Among the many paragraphs of “boilerplate” terms one will find two discreet paragraphs that require checking little boxes and initials. The parties to the transaction must be aware of those paragraphs and their importance. Those provisions are opt-in provisions for Alternate Dispute Resolution (ADR) if a dispute arises between the buyer and seller over the transaction after the offer is accepted and all parties have signed the contract (the contract will include counter offers and acceptances and any Demand for Performance).

ADR is an effort by the legal system to re-route potential litigants through a process designed to resolve disputes more quickly and less expensively than fighting it out in a courthouse. Under the CAR provisions, there are several things for the parties to consider when deciding whether to opt in to the ADR provisions.

First, the most expensive elements of any litigation in which an attorney is hired to represent a party is the fees the party will pay the attorney. Many people who have never had to hire an attorney, believe that as a part of their case, they can recover the fees they expend. Unfortunately, that is often not the case. In California there are only a few ways one can be awarded attorney’s fees in litigation. The most prevalent are if recovery of fees is part of a contract or if attorneys’ fees and costs are provided by a statute. Since fees in real estate transactions are not statutory, the contract must make the allowance. CAR contracts have such a condition, albeit optional.

Next, the CAR contract requires that if the parties wish to have the ability to recover attorneys’ fees in a dispute over the property, all parties must opt-in to the ADR provisions. If both don’t agree to pursue ADR before suing, neither party can recover fees if they prevail.

Once the Parties have opted in, they must realize that the ADR provision is a mandatory 2-step process. First, the parties agree that if a dispute occurs they will first participate in Mediation. Mediation is negotiation facilitated by a trained mediator. The success rate of mediation in real estate cases where the parties attend in good faith is impressive and, if successful, will end in an enforceable written agreement which is convertible to a judgment without litigation (trial) if one party fails to perform. The key is the willingness of the parties to participate in good faith, i.e. willing to negotiate and desirous of settlement. Mediation is a mandatory prerequisite to the second step.

The next step if the case doesn’t resolve at mediation is binding arbitration. Arbitration is a private trial conducted by an Arbitrator selected by the parties to hear the case and render an award that can be confirmed as a judgment. Binding arbitration requires the parties to waive their right to a jury trial in favor of having their matter determined by a neutral arbitrator. The entire ADR process can be completed within a few months once it has begun.

IMPORTANT CONSIDERATIONS OF THE C.A.R. ADR PROCESS

Far too often disputing parties view the CAR ADR process as a “check list” that must be completed before the real dispute can be addressed. In that case one or both parties will engage a mediator with absolutely no intention to negotiate or will place so many prerequisites or hurdles to beginning mediation, that it can’t take place. I suggest that both are huge mistakes and missed opportunities.

Mediation as Part of the Process

When the parties opt in for mediation and arbitration, they are doing so to avoid the miseries attendant to a law suit and the expenses of the endeavor. Because of the occasional tendency to ignore the obligation attached to the decision to opt in, neither the seller nor the buyer fully understand the importance or utility of the process.

Mediation affords the parties the opportunity to work together to resolve a problem and to fashion a resolution tailored to meet their needs. This process demands compromise from both sides to achieve resolution. Frequently, parties are misguided in their perceptions of their position in such a dispute apparently believing they have a “slam-dunk” case. In my years as a litigator and ADR specialist, I have never seen such a case. When parties in these conflicts approach mediation seriously, they will probably settle their cases and even if they do not, they will narrow the issues to be arbitrated.

The parties should prepare. If they need the opinion of experts such as contractors, engineers, appraisers, etc., those opinions should be well prepared reports to be shared with the opposition. If an inspection of the property by either side be desired, it should be allowed and completed well before the mediation so all parties will know what the real issues may be. Remember, mediation is a means to avoid litigation at arbitration or in court. With that in mind, the parties should recognize that any “discovery” available in the litigation process should be available, within reason, to prepare for mediation. I have seen cases where property inspections were desired but the parties placed so many restrictions (not recognized in the law) upon the inspections they never occurred.

The purpose of those processes is so both parties will have a clear picture of what is needed to solve the problem. As a negotiation process, if both parties have a clear understanding of the issues and the ability to analyze the problem for a resolution it is more attainable. I suggest that it may be a good idea for the parties to share the expense and engage a neutral specialist to provide a neutral evaluation as a basis for discussion. I am asked from time to time in a variety of cases to engage such professionals on behalf of the parties. That helps cut through the conflict since the expert and the parties know that the engaged expert is working for the neutral for resolution. One would be surprised in the difference such a report is from a party-position report. Remember that no party will ever engage a professional/expert to assist in a case if that expert does not support the side of the party doing so. Such expert opinions are riddled with positional bias.

Once a neutral opinion is obtained, a mathematical resolution is achievable. For that reason, mediators in large construction defects cases hire independent experts to assist in the analysis.

Participation

Once the parties are prepared with their investigation and position generation, they should attend the mediation with an open mind to see what the opposition has to say. I have many times participated in mediations in which the parties were not even aware that they agreed on major points because they had not communicated. Our adversarial system creates such a situation. I teach my students that when communication ceases, conflict intensifies. Even if a mediator is employed solely to facilitate or enhance communication, in the long run it will be a good investment toward peaceful resolution.

How Might I Proceed?

Over the past 3 decades of litigation and observation, the most reasonable approach to these matters seems to take the following general path:

1. Discovery of a problem;
2. Investigation of the problem to see if something was missed;
3. Review of the buy/sell agreement for disclosure issues, warranties or notices of exclusion of certain warranties;
4. If the problem involves property boundaries, easements, or any other matter that may be covered by a Title Insurance policy, contact the Title Insurance company;
5. If it will not be handled by the insurance company, seek and engage an attorney familiar and experienced with issues such as yours for a consultation, only;
6. Make sure that the consulting attorney knows that it is a consultation, only, and that even if s/he is very supportive and positive about your case, you will NOT be engaging his/her services for litigation;
7. Once the consultation is complete and the attorney opines that your position is good and compensation should be pursued, contact the other party (buyer or seller) in writing describing your problem and indicating that you wish to resolve the issue informally. If the opposition is not amenable to that approach, demand mediation under the specific paragraph in your Purchase and Sale agreement. Demand or request commencement of the mediation process within a short time (perhaps 30 days) under the contract.
8. If the process is agreed, engage a mediator with the expense of the mediation to be shared equally by the parties;
9. Request a joint meeting or conference call with the mediator to determine what investigation must be completed before the next session. The mediator can negotiate this process with the parties;
10. As soon as the investigation is complete, schedule the mediation;
11. Before the mediation session, prepare and brief the mediator. The parties may wish to engage counsel to be mediation advisors to assist with the mediation since mediators do not provide legal advice;
12. Attend and participate in the mediation intending to settle and work hard with your mediator toward resolution.

Sometimes, as a part of this process, the parties will obtain a Confidential Mediator’s Evaluation before mediation sessions proceed. The Mediator will make an analysis, obtain authority as needed from the parties to engage a recommended expert/professional to assist with technical issues and secure advance payment for those experts. Once the mediator has completed his/her investigation, s/he will issue a confidential evaluation with recommendations for resolution. Being subject to the confidentiality law of mediation, that report will be advisory, only, but will offer the parties a neutral evaluation before the dispute escalates. After that point, if the parties wish to continue with that mediator or engage another to complete the negotiations toward settlement, it can be done with a clearer expectation of the outcome at a reasonable expense and with the highest probability of resolution.

Remember

There is a song from the 1960s, “Give Peace a Chance.” That is the point of mediation. Pursuing the option to mediate and arbitrate your real estate dispute will do just that. The parties have absolutely nothing to lose form engaging in a meaningful mediation. Nothing that happens is admissible in any court or arbitration except any agreements the parties make. If the case does not settle at mediation, the parties are better prepared to proceed to binding arbitration or trial. Trotting off to the courthouse for relief is NOT your BATNA (Best Alternative To a Negotiated Agreement). It is usually your WATNA (Worst Alternative To a Negotiated Agreement). The only ones who profit from litigation are the attorneys since litigation seldom brings the parties relief or makes the winner whole. One of our most revered former Presidents said, “Discourage litigation. Persuade your neighbors to compromise whenever you can. Point out to them how the nominal winner is often a real loser — in fees, expenses and waste of time.” — Abraham Lincoln

 

Donald Cripe is a conflict resolution professional; a law professor who teaches mediation and negotiation; a contributor to a text book on advanced mediation practices and is a co-founder and principal of California Arbitration & Mediation Service.