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The Three Biggest Mistakes (and One Bonus Mistake) in Mediating a Residential Purchase Dispute

Kenneth R Van Vleck

Summary

  • Buyers and sellers in residential real estate transactions should be aware mediation will frequently be required for related disputes.
  • Choosing the right mediator and approach to the mediation brief can dramatically affect the mediation’s success.
  • Read on to learn more about the common mistakes made by parties and counsel in these disputes.
The Three Biggest Mistakes (and One Bonus Mistake) in Mediating a Residential Purchase Dispute
Andrii Yalanskyi via Getty Images

The vast majority of residential real estate transactions in most states are documented using forms derived from state chapters of the National Association of Realtors. These forms contain a mandatory mediation provision compelling parties to mediate a dispute before beginning litigation or arbitration. Parties and counsel make three common mistakes in disputes under these agreements.

First Mistake: Not Mediating at All

Each state chapter of the National Association of Realtors has its own version of the residential purchase agreement (RPA). In each version there is a mandatory mediation provision. The terms vary slightly across state chapters, and the courts’ interpretations of each varies too. But the requirement, and penalty for failure to mediate, is uniformly upheld. Note that although substantially similar over the years and across states, the most recent language from the applicable state chapter of the National Association of Realtors should be reviewed when considering its application to your case.

California and Hawai’i case precedent have each addressed two common versions of these clauses.

California’s language states that “[i]n any action, proceeding, or arbitration between Buyer and Seller arising out of this Agreement, the prevailing Buyer or Seller shall be entitled to reasonable attorney's fees and costs from the non-prevailing Buyer or Seller, except as provided in paragraph 17A.” In turn, paragraph 17A details the following as to mediation: “Buyer and Seller agree to mediate any dispute or claim arising between them out of this Agreement, or any resulting transaction, before resorting to arbitration or court action, subject to paragraphs 17C and D below. Mediation fees, if any, shall be divided equally among the parties involved. If, for any dispute or claim to which this paragraph applies, any party commences an action without first attempting to resolve the matter through mediation, or refuses to mediate after a request has been made, then that party shall not be entitled to recover attorney's fees, even if they would otherwise be available to that party in any such action. . . .”  Frei v. Davey, 124 Cal.App.4th 1506 (Cal. Ct. App. 2004).

Hawai’i’s language is slightly different: “If any dispute or claim arises out of this Purchase Contract prior to or after closing between Buyer and Seller, or between Buyer and/or Seller and a Brokerage Firm and all its licensees assisting in this transaction, and the parties to such dispute or claim are unable to resolve the dispute, Buyer and Seller agree in good faith to attempt to settle such dispute or claim by non-binding mediation. . . .” Nakaoka v. Shizuru, 517 P.3d 793 (Haw. Ct. App. 2022) (aff’d Nakaoka v. Shizuru, 531 P.3d 1081 (Haw. 2023) (reconsideration denied)).

The mandatory mediation provision is often overlooked by counsel eager to move quickly. But the consequences of such oversight are substantial.

For instance, the California Court of Appeal upheld the mediation requirement and the penalty for failing to mediate. In Frei, the Daveys argued “they should be excused from their refusal to mediate because, they contend, mediation would not have been successful. Mr. Davey asserted that when he received the Freis’ counsel’s November 30, 2000, letter requesting mediation, he “did not feel that mediation was likely to be fruitful.” After a meeting between the Freis and the Daveys on December 4, 2000, “it was apparent to [the Daveys] that mediation would be of no benefit.” The court disagreed, noting the “language in the Agreement means what it says — a party refusing a request to mediate a dispute that ripens into litigation may not recover attorney fees at the conclusion of the litigation, even if that party is the prevailing party.” This significantly unbalances negotiations during litigation, as only one party may collect attorney fees if successful.

In  Nakaoka, the Intermediate Court of Appeals of the State of Hawai’i upheld a trial court’s judgment against the plaintiff on their failure to disclose claim, holding that satisfying the Hawai’i Association of Realtors version of the mediation clause is a condition precedent to suing, though the court retains jurisdiction to award fees to the prevailing party. The Nakaoka court cites several similar decisions from other jurisdictions.

Second Mistake: Not Choosing the Right Mediator

Finding the right mediator need not be a challenge. Many of these contracts reference an available panel of mediators specifically trained to interpret the local jurisdiction’s RPA.

If you choose not to use the panel identified in the RPA, find someone familiar with the form and with the real estate laws in your jurisdiction to avoid surprise related to jurisdiction-specific outcomes. For instance, a buyer may be entitled to the return of its entire deposit in some jurisdictions, while in other jurisdictions, under identical facts, the seller could keep the deposit. Further, a liquidated damages provision in a contract may sometimes entitle the seller to keep a deposit, while in other circumstances the liquidated damages provision may be unenforceable. And sometimes, even if enforceable, local laws may require return of some portion of the deposit under certain circumstances. Familiarity with those laws will be important in guiding the parties to an intelligent settlement decision.

Finding a mediator with subject-matter expertise is important. After that, other considerations of price, availability, and mediator style may be considered. But finding a low-priced, available, and stylistically perfect mediator will be meaningless without the requisite expertise.

Third Mistake: Not Preparing a Mediation Brief

Real estate mediations often happen on short notice. And because there is no action pending, the parties may not prepare a mediation brief, or will simply send the mediator a copy of the letters already exchanged. Because this is compelled mediation under the RPA, parties often believe there is no probability of success—why would the outcome be different in mediation compared to the extensive letter-writing campaign already waged? Counsel also may choose to save money by not preparing a brief or may believe disclosing too much in mediation will hamper their ability to later get concessions in litigation. Or counsel may not wish to educate the other side about errors already made.

But a well-written mediation brief, supported by exhibits showing why a party may get the relief sought, is a powerful tool to compel settlement. A brief has multiple purposes and audiences. Regarding the mediator audience member, who is already familiar with the law and the RPA contract, the brief states the critical facts and documents to get the parties to a settlement. The brief may give the mediator the timeline of a revised disclosure regarding the property that led the buyers to rescind the RPA, with emails and perhaps photos of the newly disclosed condition. Regarding the opposing counsel audience, the brief may provide critical information damaging to opposing counsel’s position, or help opposing counsel unfamiliar with the law understand why pressing a position will be unproductive. It may even give opposing counsel a tool to use with his or her own clients to explain why they should adjust their expectations.

Finally, a mediation brief is an opportunity to frankly and fairly explain to the parties on the other side why they have risk, or why your client took certain action. While the brief is not sent directly to opposing parties, the information in the brief will end up with the opposing side regardless, a key to settling. Using a brief to explain how a new disclosure affected a buyer’s willingness to purchase a home can help an opposing party understand a position, even while not agreeing with it. And explaining the law in your jurisdiction in layman’s terms can help parties appreciate their exposure.

Bonus Mistake: Not Sharing Your Mediation Brief

An attorney who does not appreciate there are multiple audiences for the mediation brief may choose not to share it, believing the mediator is his only audience. Or the attorney may withhold it to avoid giving the other side a roadmap, the evidence, or the arguments they will face at trial. But the mediator can only meaningfully use information that may be shared with the other side. So, either the information will ultimately be shared with the other side regardless, or it will be useless.

There are only two places a compelling argument or damning piece of evidence may be used to get money. One is in trial or arbitration and the other is in settlement discussions. In the modern world of litigation, evidence will be disclosed in discovery, so withholding it in mediation makes little sense. Arguments should be stress tested well before trial. Compelling arguments will win out. Lesser ones should be exposed and discarded early.

Share your briefs.

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