In the previous blog post we covered basic guidelines for reading home purchase agreements carefully. Now we’ll explore four potential landmines for buyers if the fine print is not clearly understood. Most real estate transactions go smoothly, but issues like breach of the purchase and sale contract, post-sale home defects and disclosures can create post-sale problems. Your options regarding these problems could be limited to what you can accomplish through mediation or arbitration.
Why is arbitration mentioned in a home purchase agreement?
Arbitration is a common method of solving disputes involving contracts. It is more complex than mediation, and may result in irrevocable decisions. Arbitration is often the next step if mediation (a process where parties share grievances and attempt to resolve issues amicably) is not an option, or fails. Arbitration is binding, which means a neutral arbitrator or panel makes a decision that prevents all further legal action by all parties.
Why do people choose arbitration instead of just going to court?
Arbitration requires careful preparation, time to accomplish and involves seeking help from an attorney. Arbitration is similar to litigation in the Superior Court but you do not have a jury of your peers. The arbitrator or panel is a neutral decision maker, and is experienced in solving real estate disputes. They are not “taking sides” but making decisions based on evidence and the terms presented in your contract. Arbitration is usually private, so you avoid a permanent public records.
What is an “arbitration clause?”
The California RPA (Residential Purchase Agreement) has a section that defines the requirements for dispute resolutions not resolved through mediation. The clause outlines the situations when arbitration can and cannot be used, and the role of real estate agents in arbitration. This section states that when both buyers and sellers initial the clause, any future arbitration results are binding. Both parties give up all rights to litigation in the superior court and any possible appeal.
What are some downsides of arbitration?
1. If your dispute arises from circumstances that are highly complex and extensive evidence is needed to succeed, you could be challenged to gather evidence (conduct discovery) from the opposing party.
2. You cannot appeal, and you cannot then sue the opposing party, even if there was a problem with the arbitration process except in rare instances.
3. While arbitration is usually promoted as being less costly than litigation, it is by no means inexpensive. You will often absorb much of this cost, such as arbitration fees and costs yourself.
4. Arbitration is normally private, so you will not be setting any legal precedents or “making an example” of the other party in public.
Who pays the cost of arbitration services?
Check your real estate agreement to see if this question is answered. Sometimes parties in dispute share arbitration costs equally, or proportionally according to the final judgement. In other cases, the “losing party” pays attorney’s fees and costs if required by the arbitrator.
So, should I sign initial the arbitration clause in my sales agreement?
Your contract usually requires your initials to indicate you understand all the terms and ramifications of mediation and arbitration should disputes arise. This is the point in the signing process to ask for clarification, and determine if you and the other party are required to initial this section. If you need reassurance or would prefer not to check this box, consult with a real estate attorney to explore your options. In today’s high stakes real estate transactions caution is a good thing.
Know Your Rights. Protect Yourself.
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