By Michael Repka, ESQ. | CEO & General Counsel
Most real estate transactions close without a hitch. Agents on both sides explain the rights and responsibilities to their clients, and everyone does as required and expected. By and large, agents are competent and thorough, and buyers and sellers are reasonable. But, things don’t always go as planned.
When a dispute arises, most parties fall into one of two camps. There are those who are too eager to sue, and those who are too scared of litigation. This often leads to unfair results. In an effort to avoid lawyers, some parties give in and give up their rights or claims, even though they are entirely correct in their positions and could receive restitution with little effort. On the other hand, some parties casually threaten litigation as if it were a mere inconvenience rather than an onerous process.
Fundamentally, when a dispute arises, the parties need to understand their rights and the various options to help resolve these issues. Armed with this information, parties are often able to reach an agreement that is fair to all and quite efficient.
It is important to note that most real estate firms, with the notable exception of DeLeon Realty, do not provide legal advice or free access to an attorney.
Standard Form Contracts
In Silicon Valley, most residential real estate agents use a standard form contract from either the California Association of Realtors® (CAR) or the Peninsula Regional Data Service (PRDS). Given the prevalence of the PRDS contract in Palo Alto and surrounding cities, this article will focus on its provisions. Most of the rights and responsibilities of the parties to a residential real estate agreement are described in the PRDS real estate purchase contract. Unfortunately, many clients do not read it closely enough, and their real estate agents do not explain its provisions. A considerable amount of time, money, and aggravation could be avoided if the parties thoroughly understood what they were signing before submitting or accepting an offer. A good real estate agent or manager should be willing and able to explain all of the provisions of the contract that the client is being asked to sign. In fact, California case law specifically holds that agents are expected to do just that (Alhino v. Starr, 112 Cal. App. 3d 158, 172). If not, clients should ask to speak with a licensed attorney who handles residential real estate matters before signing either an offer or a listing agreement so that the attorney can explain all of the provisions.
It should be noted that the CAR and PRDS contracts and related documents provide significant protection to real estate brokers and salespeople, in addition to defining the rights and responsibilities of the parties. As discussed in “Structuring Listing Agreements” (The DeLeon Insight, September 2015), prudent sellers can and should request an addendum to the listing agreement that itemizes all of the responsibilities of the listing agent.
When a dispute cannot be resolved through reasonable discussion, there are four main options available: mediation, arbitration, litigation, and small claims court.
Mediation is a non-binding process in which the parties, with or without attorneys, meet with an independent third party to come to a common agreement. In practice, this can be a very useful step because it helps the parties understand their rights and obligations and the cost associated with continuing the dispute.
Under the PRDS contract, mediation is required irrespective of whether the parties agree to the arbitration clause (discussed later), and no party can collect attorney’s fees from the other side if they refuse to mediate. It should be noted that real estate agents are not required to participate in mediation under the terms of either the CAR or PRDS contracts, although they can agree to do so. All clients should consider requesting a written commitment from their agent’s managing broker stating they will participate in any and all mediation at the request of their clients. This written commitment should be obtained at the beginning of the relationship.
Arbitration is somewhat similar to mediation, with the key exception that it is binding. In arbitration, the buyer and the seller arrange for the services of a private arbitrator to settle the case. Instead of a trial, arbitration provides an informal hearing with the arbitrator, the buyer, the seller, and usually the buyer’s and the seller’s attorneys. Documents may be submitted and witnesses may be called to testify. Following a hearing, the arbitrator renders a decision, which is generally binding—even if wrong. In other words, the loser’s right to appeal is generally extremely limited.
While arbitration is often thought to be faster and less expensive than litigation, it is still a costly undertaking and almost always involves attorneys. Additionally, according to the standard form contracts, real estate agents are not required to arbitrate. As a result, the buyer or the seller may have to initiate a separate action in court to seek damages from a real estate agent or broker. However, had the parties not initialed the arbitration clause, they would have been able to sue both the agent and the other party in the same action in the court of law. Similar to mediation, when engaging an agent, all clients should consider requesting a written commitment from their agent’s managing broker stating they will participate in any and all arbitration proceedings at the request of their clients. If the agent and the managing broker of the real estate office are unwilling to make this commitment, then the client may want to consider finding a different real estate agent with whom to work. It is important to get this commitment in writing and signed by both the agent and the managing broker.
Think Perry Mason, but without the drama. Litigation is simply suing someone in court. This process is expensive and time-consuming, but the court’s rulings may be appealable to a higher court.
Although many clients with legal training actually prefer litigation over arbitration because “bad” decisions can be appealed, careful consideration should be given to the potential impact of not initialing the arbitration clause as it could affect the strength of the offer. Many sellers (or their agents) prefer arbitration because of the presumption that it is quicker and less expensive than litigation, so an offer that does not include arbitration may be a competitive disadvantage.
Small Claims Court
Irrespective of whether the parties initialed the arbitration clause, small claims court is a fourth option available to settle disputes of $10,000 or less. The process is fairly simple, and all parties represent themselves. The elimination of attorneys on both sides makes this a valuable, albeit underutilized option for many of the smaller issues that might arise after a sale.
Although vigilance and good professional guidance should be able to keep most buyers and sellers out of disputes, a thorough understanding of the contract terms and the dispute resolution options will provide guidance should the unexpected arise.
When a dispute arises, it is certainly important to receive good counsel regarding the appropriate venue to resolve the matter in a way that is fair, equitable, and cost-effective.