SHOULD YOU INITIAL THE ARBITRATION CLAUSE IN YOUR REAL ESTATE CONTRACT?
With a recovering and booming real estate market, legal disputes are growing. Today’s Article will focus on a key provision in the most common real estate contract: the Arbitration Clause.
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Should You Initial the Arbitration Clause in your Real Estate Contract?
By Steve Beede, BPE Law Founder / Counsel
Today, most people buying or selling residential real property in California use the Residential Purchase and Sale Agreement published by the California Association of Realtors (CA-RPA).
While this form of Agreement covers the majority of decisions which must be made, many of its provisions are not clearly understood by buyers and sellers and even by their real estate agents. Critical among these is the Alternative Dispute Resolution (ADR) section that contains two provisions: 1) Mediation; and 2) Arbitration.
1. Mediation – Many legal disputes can be resolved early if the parties present their concerns before a neutral third party, called a mediator, who can help the parties in an attempt to reach a mutual understanding of their rights and obligations under the Contract before they spend thousands of dollars pursuing litigation in the Courts or alternatively, binding Arbitration. While mediators are often attorneys experienced in real estate matters, many times real estate brokers, or panels of volunteers in an industry association provide this service. Such Programs are available through the Sacramento Association of Realtors (SAR) and the Placer County Association of Realtors (PCAR). Both Keith Dunnagan and I also serve as mediators regularly. The important part however about the Mediation provision in the CAR agreement is that Mediation is mandatory in any dispute unless an exemption applies.
2. Arbitration – Arbitration is a process for resolving disputes which is an alternative to litigation in a courtroom before a Judge (and possibly a jury). Instead of filing a lawsuit and going to court the disputing buyer and seller parties use the services of a private arbitrator such as American Arbitration Association (AAA), or Judicial Arbitration and Mediation and Service (JAMS), or a similar dispute resolution service. Most often the arbitrator will be a retired judge or a lawyer, but in many cases an experienced non lawyer, such as a real estate broker, may service as arbitrator if the parties so agree. Instead of a public trial in a courtroom, arbitration is an informal hearing which takes place in private, in a conference room with the arbitrator, the parties and their lawyers. In many ways arbitration is considered “private trial” but there are two major distinctions: in arbitration there is no trial by jury and there is no right of appeal… the arbitrator’s decision is binding.
– Initialing is required to elect Arbitration: Unlike the Mediation provision, the Arbitration provision is not mandatory. If the Buyer wants Arbitration, they must initial the box on the CAR form indicating their choice. However, merely because the Buyer chooses Arbitration does not make it effective. To make the choice binding on both Buyer and Seller, the Seller must also initial the box. In legal terms, they must mutually agree to the use of binding Arbitration to resolve any dispute.
– Should you initial the choice of Arbitration or not? There is no single correct answer to this question and it should not be treated as merely another box to be initialed even if their real estate agent suggests that. There are definite pro’s and con’s for either decision. Many people consider it a Pro that arbitrations are designed to be faster and, consequently, less expensive. Generally, an arbitration process will get the parties to a conclusion far quicker than a court trial and especially enabling the parties to avoid the multiple pre-trial court procedures that can ratchet up attorney costs. On the other hand, many others consider it a Con that with arbitration they give up of the right to a jury and to appeal. Further, the cost savings of a faster proceeding may get eliminated by the costs of paying for the arbitrator on an hourly basis. So, the decision on whether or not to elect arbitration often rests on that party’s comfort zone as to the risks they may face in buying or selling a property. Some indicators suggest that Buyers more often decline to elect arbitration because they are not sure what they are getting into and want to preserve all of their possible remedies. On the flip side, Sellers may more often elect arbitration because they know the property and their risks and wish to control the process. While again, no arbitration agreement arises unless all buyers and sellers agree, some Buyers will initial the provision anyway if merely to avoid possibly signalling to a Seller that they may be more litigious.
3. Exemptions – regardless of whether or not the Buyer and Seller agree to resolve disputes through Arbitration, some matters identified in the Contract will generally be exempt from the requirement. These include:
(a) Foreclosure actions;
(b) Unlawful Detainer (Eviction) actions;
(c) Filing a Mechanic’s Lien;
(d) Filing a lawsuit to record a Notice of Pending Action or for provisional remedies
4. Impacts of Real Estate Agents – Although the Mediation and Arbitration provisions may be binding on the Buyer and Seller, they are not binding on the real estate brokers or agents involved in the transaction. However, the Brokers and Agents can agree to participate in the ADR proceedings if they agree to do so in writing. Their agreeing to do so does not make them parties to the Purchase and Sale Agreement.
For over 20 years, the attorneys of BPE Law Group, P.C. have been assisting our clients with their real estate, business, and other legal needs. If you have questions concerning real estate, business, or any other legal matter, give us a call at (916) 966-2260 to schedule a Consultation with one of our experienced attorneys or email Keith at email@example.com.
This article is not intended to be legal advice, lending advice, or a specific recommendation of any particular lender or company, and should not be taken as such advice.