Mandatory Arbitration Clause in a Real Estate Agreements - Should You Sign?


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When a person is buying commercial or residential real estate, he or she may sign a lot of papers. Often, the person may not know the substance of every document he or she signs. One such document or provision in a longer agreement that the individual may sign is a mandatory arbitration agreement. This provision can impact important rights of the buyer and seller, so it is important to understand this information before signing.

Legal Disputes Involving Real Estate Transactions

During a real estate contract, disputes may arise for various reasons. The buyer may believe that the seller hid certain aspects of the sale and did not provide full disclosure about the condition of the property. The buyer may have walked away from the sale after signing the contract. A new lien or easement may be found on the property after the sale has gone through.

Lawsuits in Real Estate Transactions

When a legal dispute arises, many parties may consider filing a lawsuit. This process involves hiring a real estate lawyer who alleges the legal grounds and the remedy that the party wants. Filing a lawsuit is only the beginning of the process. After this complaint is filed, the party must pay to serve the other party. Then, discovery is often conducted, which consists of the parties sending questions or demands back and forth.

Litigation is often very expensive. In addition to court costs, the parties are each responsible for their attorney’s fees. If an expert witness is necessary, the party presenting him or her must pay for this additional expense. Additionally, because there are so many cases in court already, it can take a long time before a judge will hear the case. After the judge or jury hears the case, a verdict is made. However, either party may choose to appeal the decision, making the process longer and more expensive.

Arbitration as an Alternative

Due to the substantial disadvantages of litigation, arbitration is often used as an alternative. Arbitration is supposed to be a more affordable and faster alternative to litigation. Rather than a judge deciding a case, an arbitrator that the parties select makes the decision. This can be preferable because the parties can select an arbitrator with a background and knowledge of real estate transactions rather than having a randomly selected decision maker. If the arbitration is binding, there are generally no appeals by using this process, so it has greater finality than litigation.

Disadvantages to Arbitration

However, arbitration does have its downside. By agreeing to arbitration, a person is waiving his or her right to a jury trial and agreeing to have the case heard by an arbitrator. While the parties get to select the arbitrator, this is often done by a process of elimination. For example, the parties may start with a list of possible arbitrators and they may each go back and forth as they dwindle the list down.

Because arbitration is designed to be a faster and cheaper alternative to litigation, there are often shortcuts in the process. For example, discovery may be limited. This may mean that you will not have as thorough of an opportunity to get information and evidence from the other side as you would if the case was litigated. In a lawsuit, you may be able to acquire the information you want through the longer discovery process.

Additionally, your right to appeal may be limited to only situations in which fraud was involved. If you wind up with a result in arbitration that you do not like, your recourse may be very limited. In litigation, you may have valid arguments to appeal a decision, such as the arbitrator making a mistake in the law, ruling improperly on an evidentiary manner or other issue. In arbitration these mistakes likely will not be adequate to permit an appeal of the case.

Arbitration After the Fact

A party makes mandatory arbitration a part of the agreement by initialing by the clause in states that use this format or by signing the full agreement in which a mandatory provision is included. If the party refuses to sign the arbitration agreement and the transaction goes through, arbitration may be suggested by one of the parties if a dispute does arise. Courts prefer to have parties arbitrate cases because their own dockets are likely full, so this removes one more case from them. A real estate lawyer can explain whether signing an arbitration agreement will be in your best interest.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.

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