Most real-estate transactions go off without a hitch. Agents on both sides explain the rights and responsibilities to their clients and everyone does as required and expected. By and large, agents are competent and thorough and buyers and sellers are reasonable. But not always...
When a dispute arises, most parties fall into one of two camps: There are those that are too eager to sue and those that are too scared of litigation. This often leads to unfair results. In an effort to avoid lawyers, some parties give in and give up their rights or claims even though they are entirely correct in their position and could receive restitution with little effort. On the other hand, some parties casually threaten litigation as if it were a mere inconvenience rather than an onerous process.
Fundamentally, when a dispute arises, the parties need to understand their rights and the various options to help resolve these issues. Armed with this information, parties are often able to reach an agreement that is fair to all and quite efficient.
The standard-form contracts
In Silicon Valley, most residential real-estate agents use a standard-form contract from either the California Association of Realtors (CAR) or the Peninsula Regional Data Service (PRDS). Given the prevalence of the PRDS contract in and around Palo Alto, this article will focus on its provisions.
Most of the rights and responsibilities of the parties to a residential real-estate agreement are laid out in the nine-page PRDS Real Estate Purchase Contract. Unfortunately, many clients don't read it and their agents don't explain its provisions. A considerable amount of time, money and aggravation could be avoided if the parties thoroughly understood what they were signing before submitting or accepting an offer. A good agent or their manager should be willing and able to explain all of the provisions of the contract that you are being asked to sign.
It should be noted that the CAR and PRDS contracts and related documents provide significant protection to real estate brokers and salespeople, in addition to defining the rights and responsibilities of the parties.
When a dispute cannot be resolved though reasonable discussion there are four main options available: mediation, arbitration, litigation and small claims court.
Mediation is a non-binding process in which the parties, with or without attorneys, meet with an independent third party, to come to a common agreement. In practice, this can be a very useful step because it helps the parties understand their rights and obligations and the cost associated with continuing the dispute.
Mediation is contractually required irrespective of whether the parties agree to the arbitration clause (discussed below) and no party can collect attorney's fees from the other side if they refuse to mediate. It should be noted that the contract provides that real-estate agents are not required to participate in mediation.
Arbitration is somewhat like mediation, but with teeth. In arbitration, the buyer and the seller arrange for the services of a private arbitrator to settle the case. Instead of a trial, arbitration provides an informal hearing with the arbitrator, the buyer, the seller and usually their attorneys. Documents may be submitted and witnesses may testify. Following a hearing, the arbitrator renders a decision, which is generally binding -- even if wrong.
While arbitration is generally less costly and time intensive than litigation, it is still an expensive undertaking and usually involves attorneys. Additionally, under the standard-form contracts, real-estate licensees are not required to arbitrate. Thus, a party may have to initiate a separate action in court to seek damages from a real-estate agent or broker whereas they would have been able to sue both the agent and the other party in the same action if they had not initialed the arbitration clause.
Think Perry Mason, but without the drama. Litigation is simply suing someone in court and it is both expensive and time consuming, but many argue that it is more predicable than arbitration. This predictability comes, in part, from the fact that judges do not want to be overturned on appeal, so they are very careful to follow the law established by prior cases.
Small claims court
Irrespective of whether the parties initialed the arbitration clause, small claims court is a third option available to settle disputes of $10,000 or less. The process is fairly simple and each party represents themselves. The elimination of attorneys on both sides makes this a valuable, albeit underutilized, option for many of the smaller issues that might arise after a sale.
Although vigilance and good professional guidance should be able to keep most buyers and sellers out of disputes, a thorough understanding of the contract terms and the dispute resolution options will provide guidance should the unexpected arise.