How to prepare for a real estate arbitration? When problems arise in buying or selling real estate, many participants have started to turn to real estate arbitration and mediation. Buying and selling real estate is a big decision, whether it is a family home or a giant corporate center. Negotiating and agreeing on a price is often fast-paced and can be incredibly stressful. Occasionally, problems arise when the parties are attempting to close and completer the transaction. Often, when negotiations fail, parties to a real estate contract head to litigation. However, the rise in arbitration and mediation has given parties to a real estate contract an alternative to litigation but still resolve their disputes. This article will discuss this process, detailing how mediation and arbitration may be used in real estate contracts. It will discuss the costs and effectiveness of the alternative dispute resolution options in real estate and when arbitration may be required.
Alternative Dispute Resolution in Real Estate
Real estate often benefits from both arbitration and mediation as a part of the process. Arbitration and mediation are both forms of dispute resolution that can help parties resolve disputes.
- Mediation is a nonbinding guided negotiation session between the parties. A neutral mediator will guide the parties through negotiations and into settlements that the parties can agree on. If the parties do not agree, the dispute will move forward into litigation or arbitration.
- Arbitration is a binding process between the parties. The parties present their case to a neutral arbitrator, who then decides based on the evidence presented. The parties agree to follow this decision.
Typically, the mediator or arbitrator is a lawyer or other legal practitioner with experience in the field, so in this case, it would likely be a law firm with real estate law experience.
Alternative dispute resolution can be helpful to resolve issues related to repair and inspection issues, costs, disputes over the money required to purchase, and misrepresentation cases. However, alternative dispute resolution is not appropriate if there is an allegation of criminal conduct, as an arbitrator is not allowed to make decisions on guilt. Additionally, certain types of disputes in real estate are covered by national real estate organizations, especially those concerning the realtor code of ethics.
National Association of Realtors:
The National Association of Realtors outlines how arbitration and mediation should proceed when a realtor’s ethics are placed in question. The NAR has created a code of ethics for realtors and prefers that arbitrations that take place concerning this code be handled under their process. These recommendations are usually adopted in some capacity on the state or local level. This process usually involves five steps:
- Claim and Response: The first step in the process is for a claimant to submit a claim to arbitration. This is where they state why they believe that arbitration would be appropriate and what the grounds are for the dispute. The respondent will then file a response to the claim, alleging their defenses and why they believe differently. These will serve as the basis for understanding the dispute.
- Limited Discovery: Unlike litigation, the discovery process in NAR arbitration is particularly limited. The parties can request the arbitrator order that the other party provides evidence or subpoena evidence from a third party, but this is up to the arbitrator’s discretion.
- Evidence Exchange: Regardless of what discovery was allowed, the parties are still usually required to exchange a witness and exhibit list before the arbitration hearing.
- Hearing: In some cases, the hearing will take place at the property rights in question. The arbitrator will hear testimony from the parties and listen to the evidence presented. Each party will be given the chance to present their case.
- Award: After the hearing, the arbitrator will review the case and decide based on the evidence presented. This will usually either be a finding that a realtor did violate their ethical duties or that the claim was not founded. If the realtor did violate a code of ethics, they will likely have to pay the claimant.
This process provides a solid outline for parties that are facing issues with the way that a realtor handed their sale. Realtors are held to high standards of accountability in their practice, and arbitration focusing on ethical implications provides a way to hold real estate agents accountable for their missteps. Many realtors who belong to the National Association of Realtors have contracts with their agency and with their clients that such disputes will be submitted to arbitration. However, it is important to remember here, as stated above, that if there is a question of criminal activity, the dispute should be handled through the typical legal system and not in arbitration.
Effectiveness and Costs:
Part of a discussion about using arbitration and mediation includes examining the pros and cons of using alternative dispute resolution in real estate issues. An important thing to note before looking at the options is the considerations for conciliation or small claim court. Many states have a small claims court that hears disputes under a certain amount and many states require that disputes under this amount not be recommended to arbitration. Aside from this issue, there are other important considerations to make when deciding whether arbitration or litigation is the best for a real estate dispute. Because mediation and arbitration involve different processes, it is beneficial to examine each process separately to determine if the process would be effective for a particular dispute.
Again, mediation is like a guided settlement conference where a neutral mediator listens to the parties and uses different techniques to encourage the parties to move toward settlement. There are certain aspects of the process that can be beneficial for the parties, but other aspects that may result in hardship. The aspects of mediation to consider include:
- Efficiency: Once the mediation is set up, if the parties can agree to a settlement, the dispute will be resolved when the parties sign the agreement. This can be a particularly important factor for consideration when time is of the essence—such as in disputes involving single-family homes where the parties have nowhere else to go.
- Cost: Cost can weigh both for and against mediation. While mediation usually costs quite a bit less than litigation, mediator’s fees can be somewhat prohibitive, especially in smaller disputes. However, the overall outcome may be more agreeable to both parties, so it can be better to mediate in certain circumstances.
- Creativity: Mediation allows the parties to come up with a creative solution that may not be available to them in the courts or arbitration. The parties have the chance to work with the mediator to create an agreement that matches everyone’s interests, rather than just deciding that one of the parties is in the right and the other is wrong. Additionally, it is more likely that the parties can come up with solutions outside of only money to help them come closer to an agreement.
- Nonbinding: Mediation is not a binding process until a settlement agreement is signed and it allows the parties to decide the outcome of the dispute. This is usually a good factor for mediation because it restores the parties’ ability to choose. However, it can also mean that parties may have to pay for arbitration or litigation after mediation, which can make the process feel like a waste. However, even if mediation does not produce a settlement agreement, it often helps the parties understand what is needed to settle and can lead to an independent settlement agreement after mediation.
Arbitration is a process when a neutral arbitrator hears the evidence presented by the parties and issues a decision called an award for the parties to follow. Considerations that parties should make when considering arbitration for a real estate dispute include:
- Voluntary: Arbitration, unlike litigation, is a voluntary process. The parties must agree to submit a dispute to arbitration. In real estate disputes, this is usually through a pre-dispute arbitration clause in a contract or an agreement made between the parties after the dispute arises.
- Efficiency: Like mediation, arbitration usually moves quite a bit faster than litigation, so it may be a good option if a decision is needed quickly. It will likely move a little slower than mediation because the arbitrator may take time to review the evidence presented.
- Cost: While arbitration will cost more than mediation, it can still be much cheaper than taking a dispute through litigation.
- Binding: Arbitration does create a binding result that is very unlikely to be reversed or appealed. This adds to the efficiency argument, as many litigation decisions are appealed and will not be immediately decided.
Alternative dispute resolution provides a variety of options for parties to a real estate dispute. Arbitration and mediation give parties the freedom to choose how their disputes will be settled and to save time and money. In certain cases, arbitration may be required, such as those where the parties signed an arbitration agreement or those involving an ethical issue with the realtor on the contract. However, in many cases, the parties will be free to choose how the dispute will be decided. There are important considerations for the parties to consider when deciding whether mediation or arbitration will be the best option for the dispute; however, the efficiency of the process and other considerations can often favor using arbitration or mediation, especially in disputes where time is an important issue. Using real estate arbitration or mediation can ensure that the dispute is resolved in a way that meets the parties’ needs and hopefully helps everyone involved feel comfortable with the result.
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