Articles Posted in arbitration

Contracts related to real estate transactions often have arbitration provisions included, requiring the parties to submit their disputes to an arbitrator rather than the court. Some standard forms, such as the CAR forms, have optional arbitration provisions that apply if accepted by all parties. Commercial Brokerages often require binding arbitration in the representation agreements. The argument for arbitration is that it is faster and cheaper. This may be true in low-dollar transactions, but otherwise, I believe it is a myth. Also, arbitrator decisions are not appealable, even if erroneous. I’ve written before about alternatives to arbitration, namely judicial reference and general reference, which allow hearings by a referee and oversight by the court. However, in a recent decision, a contract required binding arbitration under AAA rules (with a panel of 3 arbitrators) and the large brokerage was well on its way to bankrupting the plaintiff due to the cost of the proceeding. The court rescued the plaintiff, finding that if they could not afford the arbitration, the matter could be heard by the court.

In Weiler v. Marcus & Millichap Real Estate Investment Services Inc., the plaintiffs hired Marcus & Millichap to advise them regarding a 1031 exchange of their Las Vegas Properties for a commercial property in Texas with a Red Robin restaurant, supposedly worth $4.1 million. They claim that M&M represented that this was a solid income producing property, and that the tenant was required to pay the property taxes. Shortly after the deal closed the tenant became delinquent in rent and property taxes. The plaintiffs lost money and eventually sold the property for $2.1 million less than they had paid.

The plaintiffs filed suit, but their contract with M&M required binding arbitration through the American Arbitration Association (AAA). M&M had the court order the case to arbitration. The court retained jurisdiction for monitoring the arbitration.

Update at Bottom

Most California residential real estate contracts (such as the C.A.R. form) have an arbitration provision providing for optional binding arbitration. If the parties all initial it, it becomes a requirement of contract. In arbitration the parties agree to have a supposedly unbiased third person decide the dispute. Arbitrator’s errors and mistakes cannot be reviewed by a court, so the parties are stuck with it. In a recent decision concerning beach front property in Venice, California, a judge refused to force the buyer to arbitrate their claim.

In Lindemann v. Hume, Lee was building a $3 million dollar residence and a trust was the buyer. The trust’s beneficiary, actor Nicholas Cage, moved into the house, and immediately had problems with water intrusion and flooding. Cage told his agent to sell the place. The got an offer, and gave the buyer a disclosure stating that there was a problem with the drainage that the builder was addressing. Cage’s people hired an engineer, who reported that there was no quick fix , and any owner would need to accept the risk associated with the drainage. The buyers backed out.

I have written before about binding, erroneous arbitration awards and how arbitration awards are unappealable. I’ve also written about whether the trustee or the trustee is the party, the issue that disappointed a recent plaintiff. This plaintiff, Portico Management Group, entered a real estate purchase contract to buy an apartment building in Carmichael, CA owned by the trustees of the HC Trust and a partnership. One of the selling parties refused to sign the deed and closing documents, and the buyer sued, correctly naming the trustees of the trust as defendants.

The purchase contract required arbitration, so the court ordered the case to arbitration. The arbitration resulted in an arbitration award of more than $1.6 million to the plaintiff. The arbitration award, however, was not against the trustees, but against the trust itself, and the partnership. The arbitrator found that the trustees “are not personally liable for their acts as trustees.” Anyone in such a situation should consult an experienced Sacramento and Carmichael real estate litigation attorney, because this is where the problem arose.

The plaintiff went back to court and got a judgment confirming the arbitration award and tried to collect against the trust. They got nowhere because a trust is not an entity and therefore could not hold title to any property; the judgment was unenforceable. The buyer then went back to court to amend the judgment, but failed. The court ruled that, though the arbitrator made a mistake, the arbitrator’s decision was not subject to review.

A California court recently ruled that a Developer of a condominium project, who was sued for construction defects by the homeowner’s association, could not force the association into arbitration. Promenade at Playa Vista Homeowners Association v. Western Pacific Housing, Inc. Cal . Court of Appeal, Second District, No. B225086. This line of decisions may result in experienced Yolo and Sacramento Real Estate lawyers to advise developer clients to hold on to at least one unit in their projects.

In this case the CC&R’s (Covenants Conditions and Restrictions) contained a mandatory arbitration provision between the developers and the association or unit owners be submitted to binding arbitration. In any common interest development, the developer prepares the original CC&Rs, and usually requires arbitration. As is usually the case, here the developer’s goal was to sell the units. It had sold them all, and no longer owned an interest in the development. Eventually the Homeowners Association filed this lawsuit for construction defects related to the roofs, stucco, and many other problems.

The arbitration provision in the CC&Rs stated that it was governed by the Federal Arbitration Act, which covers contracts. The FAA was selected because it makes arbitration provisions irrevocable, and drastically limits the court’s ability to fix errors of the arbitrator.

A condominium developer in Southern California got sued by the Association for construction defects. The developer filed a motion to compel arbitration under the provisions of the CC&Rs. The court said no!

Recorded CC&Rs are made binding in disputes between owners, or owners and the association, because of their shared interest in the common interest development. CC&Rs are equitable servitudes which bind the owners and association. CC&Rs are not a contract between the developer and the owners association. There was no opportunity for “actual notice and meaningful reflection.” The association springs into existence on the sale of the first lot of the project. Maybe there is an argument that there is a meeting of the minds between the developer & the first buyer; but the rest of the buyer have no choice but to accept the CC&Rs.

So rarely do we see courts refuse to enforce unbargained for arbitration provisions (such as here) that it is an event worth celebrating.