When entering into a real estate transaction, there are a lot of legal concepts and terms that may seem unfamiliar. One important concept to understand is the arbitration clause in a real estate contract. Explanation of arbitration clause in real estate contracts and its impact on buyers and sellers.

What is an Arbitration Clause in a Real Estate Contract?

Definition of an Arbitration Clause

Arbitration clause in real estate contract means disputes will be solved by arbitration instead of court.

How Does an Arbitration Clause Work in Real Estate?

Arbitration is when a neutral third party (an arbitrator) listens to both sides, and makes a decision after hearing evidence and arguments. The arbitrator’s decision is binding on the parties involved.

Benefits of Including an Arbitration Clause in Real Estate Contract

There are several benefits to including an arbitration clause in a real estate contract. One of the main benefits is that it can save time and money compared to going to court. Litigation can be a long and expensive process, but arbitration is often less expensive and quicker. Additionally, arbitration hearings are confidential, which can be important in a real estate transaction where private information may be discussed.

Why Do Real Estate Contracts Include an Arbitration Clause?

Dispute Resolution

Real estate contracts include arbitration clauses as a way to prevent disputes from turning into lengthy and costly court battles. By agreeing to arbitration, both parties commit to resolving disputes in a more streamlined and efficient process.

Cheaper than Litigation

As mentioned earlier, arbitration is usually less expensive than litigation. Court cases often require substantial legal fees and other expenses, but arbitration can be managed more economically. Additionally, arbitration is conducted by a private arbitrator, as opposed to a judge and jury, which can save money and time as well.

Less Time-Consuming Than Litigation

In addition to being less expensive, arbitration is typically a faster process than litigation. Court cases can drag on for months or even years, but arbitration can be resolved within weeks or months. Parties in arbitration can choose an arbitrator they both agree on instead of working around a judge’s schedule, which speeds up the process.

How to Handle a Dispute Involving an Arbitration Clause in a Real Estate Contract

Mediation

When a dispute arises, it is often best to try to resolve it through mediation before moving to arbitration. Mediation is a process where a neutral third party helps the buyer and seller come to a mutually agreed-upon resolution. If mediation fails, the dispute may move to arbitration.

Choosing the Right Arbitrator

Choosing the right arbitrator is critical for a successful arbitration process. The arbitrator should know real estate law and have experience with arbitration. Additionally, both parties should agree on the selection of the arbitrator to ensure that the process is fair and impartial.

The Arbitration Process

The arbitration process begins with the filing of a demand for arbitration. The parties then select an arbitrator, and a hearing date is set. The hearing is structured like a trial but is typically less formal. Evidence is presented, witnesses are questioned, and the arbitrator makes a decision. The arbitrator’s decision is final and binding, and the parties cannot appeal.

Should You Initial the Arbitration Clause in a Real Estate Contract?

Risks and Benefits of Initialing the Arbitration Clause

Initialing the arbitration clause in a real estate contract has both risks and benefits. The benefits include lower costs and a faster resolution of disputes. The risks include giving up the right to a trial by jury and the right to appeal the arbitrator’s decision.

Consequences of Not Initialing the Arbitration Clause

If the arbitration clause is not initialed, the parties may be required to litigate any disputes in court. This can be a more expensive and time-consuming process.

Factors to Consider Before Initialing the Arbitration Clause

Before initialing the arbitration clause, buyers and sellers should consider the risks and benefits of arbitration versus litigation. It is important to consult with a real estate attorney or a realtor to determine what is best for your situation. Legal advice should be sought when looking at a standard “car form” purchase agreement versus a more complex residential real estate contract.

How Binding is an Arbitration Agreement in a Real Estate Contract?

Enforceability of an Arbitration Agreement

An arbitration agreement is binding and enforceable in a real estate contract. If a dispute arises, the parties will be required to resolve the dispute through arbitration rather than the courts.

Can You File a Lawsuit After Signing an Arbitration Agreement?

If an arbitration agreement has been signed, a party is typically unable to file a lawsuit. The signed agreement means that the parties are committed to resolving disputes through arbitration.

Exceptions to the Enforceability of an Arbitration Agreement

There are exceptions to the enforceability of an arbitration agreement. If the agreement was made under pressure or has unreasonable terms, a court can say it’s not valid.

It’s important to know what an arbitration clause means in a real estate contract, whether you’re buying or selling. Arming yourself with the right information can help you navigate any disputes that may arise during a real estate transaction.

Arbitration Clause in Real Estate Contract – FAQ

Q: What is an arbitration clause in a real estate contract?

Arbitration clause in real estate contract means disputes are resolved through arbitration instead of court.

Q: Why do real estate contracts include arbitration clauses?

Real estate contracts include arbitration clauses because they provide a quicker, less expensive, and more private method of dispute resolution than going to court.

Q: What is mandatory arbitration?

Mandatory arbitration is when a real estate contract requires the parties to resolve any legal disputes through arbitration, and they cannot opt-out of this provision.

Q: Who can initiate arbitration in real estate transactions?

Either party may initiate arbitration if a legal dispute arises. However, both parties need to sign an arbitration agreement for this option to be available.

Q: What happens if I refuse to sign an arbitration agreement?

If you refuse to sign the arbitration agreement, you may not be able to proceed with the real estate transaction or purchase.

Q: Can I still file a lawsuit in real estate even if the contract has an arbitration clause?

Generally, no. If the contract includes a mandatory arbitration clause, the parties have agreed to resolve any dispute through arbitration. However, there may be exceptions depending on the case’s specific circumstances.

Q: Who serves as the arbitrator in real estate arbitration?

The parties can choose an arbitrator mutually, or the contract may specify an arbitrator or a method for selecting one. Typically, the arbitrator is a neutral third party.

Q: What is the difference between arbitration and mediation?

Mediation involves a neutral third party who tries to facilitate a settlement agreement between the parties. In contrast, arbitration is when a neutral third party renders a binding decision after considering evidence submitted by both parties.

Q: Do I need a real estate attorney for arbitration in real estate?

While it is not required, it is recommended to hire a real estate attorney to assist you in the dispute resolution process. A real estate lawyer can help you navigate the arbitration process and protect your legal rights.

Q: What should I do if a legal dispute arises in a residential real estate transaction?

The first step is to review the contract’s arbitration provision to determine if the parties agreed to arbitration to resolve disputes. If so, you should contact a real estate attorney to assist you with the arbitration process.