Editor’s note: Robert Bruss passed away on Sept. 26, 2007. Inman News is republishing his work, which still holds value in today’s market, in an ongoing "Best of Bruss" series.
"Should I sign the mediation and arbitration clauses in this home sales contract?" That question is frequently asked by home buyers and sellers of their real estate agents.
Frankly, there is no right or wrong answer, but all the parties should be fully informed before making their decision to possibly give up legal rights.
ALTERNATIVE DISPUTE RESOLUTION. Unfortunately, lawsuits develop after home sales usually because the seller allegedly failed to disclose a serious defect with the residence. In an effort to reduce the time and cost of resolving these disputes, the specialized legal field of "alternative dispute resolution," or ADR, has evolved.
Purchase Bob Bruss reports online.
Of course, the best solution is to resolve the problem between buyer and seller on a friendly basis without litigation. Frequently, the problem is just a misunderstanding that can be easily solved.
For example, when my mom and dad purchased their condominium, the seller removed the dining room chandelier and substituted a less attractive one. The first thing my mother noticed was the missing original chandelier. A phone call to the real estate agent, who called the seller, soon resulted in reinstallation of the prized chandelier, which, because it was a fixture, was automatically included in the sales price.
However, when buyer-seller disputes cannot be resolved easily, lawsuits often develop. To prevent costly and lengthy court delays, two alternatives have evolved:
1. MEDIATION. Many printed real estate sales contracts now provide for mediation of home buyer-seller disputes that arise after the sale closes. If both buyer and seller agree to this provision, before filing a lawsuit or for binding arbitration they agree to hire a professional mediator to work out a fair settlement should a dispute arise that they cannot resolve themselves.
Expert mediators, selected by the parties and paid on a 50-50 basis unless otherwise agreed, listen to the story of each party and then try to negotiate a settlement. Usually, there is no "winner take all" in mediation. Instead, the result is often a compromise arrived at within a day or two.
The advantages of mediation include quick resolution of the buyer-seller dispute at a reasonable cost. But the primary disadvantage is the mediator has no binding power to force a settlement agreement on the parties.
If the parties refuse to negotiate, mediation can be a waste of time. However, at least both parties then understand the position of their opponent after hearing their viewpoint on the dispute.
Some real estate purchase contract forms specify if a buyer or seller refuses to mediate first, he or she will not be entitled to attorney fees as the prevailing party in either binding arbitration or a court lawsuit. Buyers and sellers should thoroughly read and understand the mediation clause before agreeing to accept it.
2. BINDING ARBITRATION. The second and better known form of alternative dispute resolution is binding arbitration. If the home buyer and seller both sign the arbitration clause in a home sales contract, they agree to binding arbitration of any dispute that might arise that can’t be resolved on a friendly basis.
For example, if the roof leaks during the first heavy rain after a home buyer moves in but the seller did not disclose a leaky roof before the buyer signed the sales contract, it looks to the buyer like the seller lied and tried to hide a serious defect. However, perhaps the seller had not lived in the house for several months and was not aware of any roof leaks. Or maybe the roof was leaking into the attic and water had not yet leaked through to the living spaces. There are usually two sides to every story.
Presuming a buyer and seller are unable to resolve their after-sale dispute either by a friendly settlement or by mediation, if both parties signed the arbitration clause then the next step is for the buyer’s attorney to notify the seller of the dispute and the buyer’s desire for binding arbitration as provided in the sales contract.
At this point, in addition to summarizing their positions on the dispute, the buyer and seller, or more likely their attorneys, will suggest names of local arbitrators. These are often retired judges or active attorneys with expertise in the field. If the parties cannot agree on an arbitrator, then each side suggests an arbitrator and the two arbitrators then select another arbitrator to handle the case.
The chosen arbitrator then arranges a hearing date when the parties will present their evidence. The setting is usually a conference room rather than a formal court room. The arbitrator then hears the evidence and witness testimony as well as asking appropriate questions.
The arbitration is often quite informal. After hearing all the evidence, the arbitrator usually renders a written binding decision, which the prevailing party can then take to the local court for entry or confirmation, just like a regular court judgment.
PROS AND CONS OF REAL ESTATE MEDIATION. Mediation is an informal procedure that often results in a mutually satisfactory settlement within a few days if the mediator does a good job and the parties are cooperative. The cost and time involved is usually minimal.
By agreeing to mediation, the parties do not give up any legal rights, but they often come to a win-win result with neither party being 100 percent satisfied nor disappointed.
PROS AND CONS OF REAL ESTATE BINDING ARBITRATION. If both the home buyer and seller agreed in writing to binding arbitration, that means they gave up substantial future legal rights in return for a relatively quick judgment by the arbitrator who hears all the evidence and then renders a binding decision.
The primary rights given up by the parties to an arbitration when signing the arbitration clause include the right to a jury trial, right to court room rules of evidence, and the right to appeal the arbitrator’s decision.
Even if the arbitrator’s decision involves a mistake of fact or the law, it is still binding on the parties. Rare exceptions could occur if a party can prove the arbitrator was bribed or had an undisclosed conflict of interest. But overturning an arbitrator’s decision is virtually impossible.
SHOULD HOME BUYERS AND SELLERS SIGN MEDIATION AND ARBITRATION CLAUSES? Before signing a mediation and/or arbitration clause, home buyers and sellers should fully understand the legal consequences. Many real estate attorneys suggest not giving up legal rights at the time of signing a home sales contract. However, if a buyer-seller dispute later arises and it cannot be resolved without litigation, at that time the parties can decide if they want to go to binding arbitration rather than a court trial.
REALTY AGENTS ARE NOT BOUND BY THESE CLAUSES. Most home sales contracts provide mediation and/or arbitration clauses for the buyers and sellers, but not for the real estate agent. There are several reasons why:
One reason is the realty agent is not a party to the sales contract and is not bound by its terms except for the sales commission, which is usually specified as a separate agreement at the bottom of the contract.
A second reason is the realty agent is involved in the marketing of the property, not the details of the sale, which are between the seller and buyer. Therefore, it would be inappropriate for the realty agent to be bound by the mediation and/or arbitration clauses in the sales contract.
A third reason, whether intended or not, is if the buyer and seller are having a dispute that is to be resolved by binding arbitration, if the buyer and/or seller thinks the realty agent did something improper, a separate lawsuit against the agent will be necessary. In addition to the costs of arbitration, lawsuit costs can also be expensive, thus making a lawsuit against the agent less likely. For more details on real estate mediation and arbitration, please consult a local real estate attorney.
(For more information on Bob Bruss publications, visit the
Real Estate Center).