Why you may want to consider mediation to maximize your claims and minimize your risk.

Tom Gallagher, Esq., Partner

The chances are good that if you purchased residential real estate in the State of California, standard purchase agreement from the California Association of Realtors (CAR), you agreed to mediation1 and arbitration2 as an alternative to having your claims heard in state court.

What’s in the mediation clause of a real estate purchase agreement?

Mediation clauses in a CAR purchase agreement require the parties to make a reasonable effort to mediate their real estate purchase or sale dispute and to attend a mediation session before resorting to filing a claim in the superior courts of the State of California.

Real estate purchase agreements usually have a clause entitling the prevailing party to recover their reasonable fees and costs. (Cal. Civ. Code § 1717).

Why seek mediation in the event of a real estate dispute?

Significant procedural problems can arise when a buyer or seller ignores the mediation and arbitration clauses and proceeds directly to the superior court.

For example, a party who does not first exhaust the alternative dispute resolution procedure (mediation) and proceeds directly to superior court could become liable for the expenses associated with the case. The other party may file a motion to compel arbitration, and the court will either stay or dismiss the case without prejudice. When a party who ignored the mediation provision prevails, they still may be barred from recovering their attorney’s fees, even if they are the prevailing party because they did not first resort to mediation as an alternative to court involvement.

In a California real estate transaction, a buyer or seller typically must demand or agree to participate in mediation before filing superior court if they wish to recover their attorney’s fees. “Seeking mediation is a condition precedent to the recovery of attorney fees by the party who initiates the action.” (Johnson v. Siegel (2000) 84 Cal.App.4th 1087, 1101 [101 Cal.Rptr.2d 412].) Attorney’s fees in California civil lawsuits can equal or even exceed the amount in controversy (the dollar value of the dispute). Therefore, this provides a strong incentive to the parties to use a full or half-day mediation session before filing suit to preserve costs and secure its right to recover its attorney’s fees and costs.

If you have any questions about Real Estate mediation (commercial or residential), please contact our firm at (858) 926-5797.

1. Mediation is an informal process where the parties negotiate before a neutral third party lawyer or retired judge who facilitates the negotiation process. Mediation is non-binding unless each party signs a written mediation agreement.

2. Arbitration is more like a private trial. A lawyer or retired judge hears the case and is empowered to make a ruling in most cases, which will be binding unless the parties agree to non-binding arbitration, which is less common. If both parties sign off on an arbitration provision, the courts will likely enforce arbitration and dismiss any case filed in state court without prejudice, then order the parties to arbitration.

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