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MEDIATING REAL ESTATE DISPUTES

This Article is designed to be of general interest. The specific techniques and information discussed may not apply to you. Before acting on any matter contained herein, you should consult with your personal legal adviser.

By Alan R. Seher, Esq.

According the late Supreme Court Chief Justice Warren E. Burger "The existing judicial system is too costly; too painful, too destructive, too inefficient for a truly civilized people. . . . Reliance on the adversarial process as the principal means of resolving conflicts is a mistake that must be corrected. . . For some disputes, trials will be the only means, but for many claims, trial by adversarial contest must in time go the way of the ancient trial by battle and blood."

In recent years there has been a growing interest in the use of mediation as a means of resolving real estate disputes rather than the traditional litigation process. Although a clause requiring mediation is now found in almost every purchase agreement, many real estate professionals and most clients have little knowledge and experience with mediation.

Mediation and its Origins

Mediation is a dispute resolution process in which a neutral third party meets with the disputants, both as a group and on an individual basis ("caucus"). The mediator attempts to facilitate communications and negotiations between the disputing parties; helping them to develop options, consider alternatives, and reach a consensual settlement that will be satisfactory to all. In some cases, the mediator asks penetrating questions and makes non-binding suggestions as to how the parties might resolve their controversy.

Mediation differs from arbitration in that an arbitrator is authorized to render a binding decision while the mediator is not. Additionally, mediators neither hear testimony nor receive evidence; and arbitrators never meet privately with a party.

Although its use in real estate disputes has only recently been growing in popularity, mediation has had a long and diverse history. The use of mediation can be found in early Chinese, Japanese, and African cultures. In Western civilization, churches have often used mediation to resolve differences amongst its members: "Blessed are the peacemakers: for they shall be called the children of God." Matthew 5:9. The Quakers in the United States extensively practiced mediation; and the Jewish Beth Din has existed for several generations as a dispute resolution body. Even Shakespeare recognized the role of mediators: "Blessed are the peacemakers on earth." Henry VI, Part II, Act II, scene 1.

The federal government adopted mediation as an alternative dispute resolution method as early as 1898, when the Erdman Act established the Commissioner of Labor and the Chairman of the Interstate Commerce Commission as mediators between operating railroad employees and carriers engaged in interstate commerce. This Act ultimately led to the establishment of the Federal Mediation and Conciliation Service by the Taft-Hartley Act of 1947. To this day labor controversies are submitted to mediation when impasses occur.

However, it was not until the 1960's that mediation and other forms of alternative dispute resolution (ADR) began to find wider usage. The Community Relations Service was formed under the provisions of the Civil Rights Act of 1964. Disputes concerning civil rights, Vietnam War protests, women's rights, consumer protection, and environmental actions began to be submitted to mediation.

In California, family mediation has been mandated since 1980 in child custody and support disputes. California law also authorizes mediation of land use disputes.

Mediation is growing rapidly in popularity. Some see it as the wave of the future in conflict prevention and resolution. The reason for mediation's growing popularity is not hard to discern, when Chief Justice Burger's comments are considered.

Beyond the pain and cost of litigation, mediation has several other advantages. Generally mediation is voluntary and non-binding. No one can be forced to participate and parties can withdraw if they become dissatisfied with the process. If the disputing parties do not agree on a solution, then they move on to arbitration or litigation; but if they come to an agreement, the resolution is formalized and the dispute is resolved.

Mediation directly involves the disputing parties in crafting a solution to the problem. Rather than having an outsider --judge, jury or arbitrator-- make the decision for them, the parties do it themselves. This fosters a greater commitment to the settlement, since it was not imposed from the outside. It also provides for a more flexible solutions than litigation.

Finally, mediation offers a way to a speedy resolution of a dispute. Rather than years, the mediation process can be arranged and concluded in weeks, at a fraction of both the emotional and economic costs of litigation.

Use of Mediation in Real Estate Disputes

As the use of mediation has grown throughout society, its use in real estate matters has exploded. This is partially due to the incorporation of a mediation provision in the California Association of Realtor’s standard Deposit Receipt And Purchase Agreement. Other publishers of real estate forms have adopted similar mediation provisions. Additionally, legislation passed in 1993 has mandated that disputes concerning common interest developments (condominiums, co-ops, etc.) must first be submitted to mediation before litigation can be commenced (Civil Code section 1354(b)).

Real estate disputes differ from other disputes in that they usually involve more than two parties. For example, a dispute arising from the sale of property may involve many parties: the buyer, the seller, buyer's real estate broker, seller's real estate broker, the pest control inspector, the property inspector, the title or escrow company, and perhaps other inspectors or contractors. Real estate disputes also typically involve the attorneys for the disputants in addition to the parties.

Diverse real estate disputes such as: landlord/tenant; Homeowner Association/member; buyer/seller; broker/client; broker/ agent; broker/broker; neighbor/neighbor; and contractor/client problems have all been successfully mediated. An often-cited statistic is that 80% of disputes submitted to mediation are resolved. The success of mediation lies with its process.

The Process Of Mediation

Mediation is a process which progresses through several stages. Each stage is an important contributor to a successful resolution. Although the stages tend to be sequential, they may not exactly follow this order.

I. Pre-mediation Case Development

The time period before the actual mediation session is very important to a successful resolution of any dispute. It is during this period that the mediator establishes a relationship with the disputants and their counsel. The mediator helps the parties come to an understanding of interest-based negotiations. Additionally, the mediation process is explained and the practicalities of the time, place, participants, and necessary documents are worked out. The confidentiality of the mediation process is emphasized. In most cases, both the disputants and their attorneys sign a confidentiality agreement. Even if such an agreement is not executed, section 1152.5 of the California Evidence Code expressly excludes all communications made in the course of a mediation from any civil proceeding. This confidentiality is essential for both open communications amongst the disputants and with the mediator.

II. Opening

The formal mediation session begins with the mediator introducing him or herself, the parties and their counsel. The mediator re-explains the mediation process including its confidentiality, sets the ground rules, and again obtains the disputants' commitment to the process. If the confidentiality agreement has not yet been executed, it is done before the next step begins.

III. Issue Development

After the opening, each of the disputants is given the opportunity to explain his or her side of the dispute, without interruption by the other parties. The mediator assists in clarifying issues, identifies the interests of the parties, and isolating the areas of agreement and dispute. Often the mediator assists in the setting of the priority and significance of each of the issues.

IV. Formation of Alternatives/Understanding of Interests

Once the parties have communicated their accounts and identified the issues of the dispute, the parties need to consider alternatives to the positions that they had taken prior to mediation. Most of the time, the parties are separated and individual caucuses are conducted. Sometimes a joint "brainstorming" session is held to stimulate new ideas. During this period, the mediator may offer suggestions as to available options that had not been previously considered. The mediator probes into underlying and often unspoken issues by the asking of pertinent questions.

V. Negotiation and Assessment

Once the parties have identified their options, they can assess their merit and begin to negotiate their acceptance. Here, the mediator often serves to facilitate communication, tests realities, and offers encouragement to the parties.

VI. Resolution

The next phase of the mediation process is an extension of the negotiation and assessment stage. The negotiation process intensifies as the easy issues are resolved. The parties trade with each other over the terms of the settlement until all issues have been resolved.

VII. Closing

The final step in the mediation process is the finalization of the resolution reached by the parties. This typically involves the parties or their attorneys in memorializing the agreement in writing. Each issue of the dispute is dealt with, item-by-item. The written record is then signed by all parties and their counsel. Once the agreement is executed, the mediation is over.

The Value Of Mediation In Real Estate Disputes

Professionals and laypersons alike can benefit from the use of mediation. For each, substantial time and money can be saved.

Real estate professionals, contractors, and inspectors are keenly aware of the value of both their time and reputation. Their future income and success are directly related to both. The confidentiality and speed of mediation addresses both of these concerns, as well as any potential licensing problem. However, the cost of litigation itself, is generally not as important to such professionals. They usually have insurance which provides for the cost of defense and for any award of damages.

Buyers, sellers, and tenants are also concerned with the speedy resolution of their disputes. However, homeowners' or renters' insurance policies do not cover the cost of either a defense or for the payment of damages in most cases. Thus, the expense of protracted litigation is prohibitive for most. Mediation holds the potential for a resolution within a modest budget.

For all parties, an unsung benefit of mediation is the ability of the parties to choose the mediator. As real estate disputes often involve technical issues involving the law, professional standards, and construction matters, the parties can select a mediator with the proper expertise and experience. This aspect alone can streamline the mediation process, and provide great savings in both cost and frustration.

As for the actual cost of mediation, it is dependent on the mediator selected. For some disputes, community mediation in which trained volunteers act as mediators, usually in a three-person panel, is adequate and carries a cost which ranges from $25 to $100 per party. However, in the more typical real estate mediation, a commercial mediator charges from $150 to $500 per hour, with most mediators charging in the $175-200 range. A real estate mediation generally lasts a minimum of four hours, with six to eight hours being typical. At $200 per hour, a full day of mediation would cost $1,600. However, as this is apportioned amongst all the parties, it usually runs from $300 to $700 per party, per day. In addition to the cost of the mediatior, each party must also add the expense of their own attorney, if any. Again, there is a wide range for attorney's fees, but fees of $1,500 to $2,500 are common. Although not inexpensive, when litigation costs $25,000 to $75,000 per side, mediation is well worth considering.

Conclusion

The use of mediation in real estate disputes is rapidly growing. Mediation offers distinct advantages over litigation; it is speedy, cost-effective, and confidential. Once the process of mediation is understood, its use in real estate disputes should be encouraged.

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