Mediation and Arbitration: What They Mean in a Real Estate Purchase Contract

Real-Estate-Purchase-ContractWhen buying and selling property, most people assume that once you sign a contract to buy or sell, it’s more or less a done deal.  Unfortunately as too many people already know, many real estate deals that seemed perfectly rock-solid can go sour, often unexpectedly and often causing real harm to one of the parties.

What most people also do not know is that when they sign that contract in California they are almost certainly agreeing to a mediation clause – but not necessarily an arbitration clause.  This is because standard real estate contracts (which make up about 90% of all contracts used) in California include a mediation clause, and it is not required that the contracting parties initial it – it’s in effect automatically.  However, if the parties wish to have a binding arbitration clause, such a clause must be explicitly initialled by each party or it is not considered to be in effect.

The difference between these clauses is important.  Mediation is a process that seeks to resolve a dispute between two parties.  The results can be binding or non-binding depending on the agreement of both parties involved.  A mediator doesn’t take sides and is unconcerned, by definition, with ‘fairness’ or ‘justice.’  The role of the mediator is simply to resolve a dispute so that it does not proceed any further.  The reason you do not have to explicitly agree to a mediation clause is because it may or may not be binding.  If you refuse to go through the mediation, however, you may be prevented from recovering legal costs even if you win your case in litigation.  This is why it’s often advisable to go through the mediation process even if you are certain it will not provide the relief you require.

Arbitration is a binding process, and as a result explicit agreement from both parties is required.  An arbitrator’s decision cannot be appealed – it is final.  The process is generally much faster than legal actions – most lawsuits take anywhere from 3-5 years to reach a resolution – and much less expensive, but an arbitration conference room is not a court house and you do not have the same legal protections and options as you would in a law suit.  The pros and cons of this type of alternative dispute resolution are obvious and must be weighed before entering into any arbitration clause.  Don’t forget you can always pursue arbitration (with the agreement of the other parties) at a later time.

If you have questions about mediation or arbitration as it applies to real estate transactions, seek out an arbitrator who is familiar in that particular state’s real estate landscape before proceeding.

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