Introduction. The problem with dispute resolution is that the players need to know when to lay down their arms. This requires a review of priorities. Wars are waged on the battlefield; they depend on a winning strategy. Peace moves in a different direction and requires far different skills. The goal is no longer victory but creating an off-ramp for the litigants to engage in discussions which should focus on peace in the future, not fault in the past. Pens have replaced pistols. With that in mind, here are some thoughts.
Settlement Prospects. First, don’t forget to look at the existing transactional documents; they may address how settlement is to proceed. For example, the OREF Sale Agreement not only encourages mediation, but it also levies a disincentive for the failure to attempt to do so. A party that refuses to first offer or agree to mediate before arbitration is underway cannot recover attorney fees should they prevail.
Mediation by a skilled lawyer-facilitator who is familiar with real estate and dispute resolution, can work wonders. The process should be at the top of every lawyer’s list – even if the disputants are out for blood. The reason is that the more time and money spent rattling swords before mediation commences can make settlement more difficult – the parties have now expended real dollars which will not likely be returned in settlement.
Performance vs. Damages. Since real estate is regarded as “unique” under the law, i.e., it is viewed as irreplaceable; damages may not suffice for a breach. Accordingly, the law may require performance under the contract rather than an award of damages.
A seller’s refusal to convey may be compelled to do so under a decree of “specific performance.” This award may be coupled with damages for the buyer’s losses resulting from seller’s delayed closing. [Note, under the OREF Sale Agreement, the seller’s sole remedy against a buyer for nonperformance is limited to monetary damages.
In other words, the seller does not have the ability to bring a specific performance claim to compel the buyer to buy. Why? The short answer – which I agree with – is that at least with residential property, specific performance against a buyer makes little practical sense. How do you “force” a buyer to fill out a loan application? How do you oversee the buyer’s information to make sure it accurately reflects their employment and credit history, their assets, etc.? Courts and arbitrators are not overseers of the buyer’s paperwork, making sure that it accurately and honestly sets forth current information. If the buyer doesn’t have the will or ability to purchase the property, the seller’s best remedy is a money judgment for their actual damages caused by the buyer’s refusal to timely close.
But before a buyer can compel specific performance, there are critical issues to consider. Can the seller convey unencumbered title? Does he/she have the legal right to do so? Are there any undisclosed liens on the property that will have to be paid before unencumbered title can be conveyed to the buyer? If so, the lienholder(s) must be named in any specific performance claim. Second, are there any non-financial clouds on the title, such as easements or deed restrictions that would be unacceptable to the buyer?
These issues underscore the need for the buyer’s attorney to first obtain a “foreclosure report” from a title company before filing anything. It will identity of any persons or entities that have may have a claim to, or upon, the subject property. Naming these parties in the litigation or arbitration is essential. Why? Because a decree of specific performance against the seller, but not against the seller’s lienholder, is not a complete award. [Tip: The recorded lienholder named in the specific performance suit will still have priority . Thus, the money paid by the buyer in closing would first be applied to clearing title, before the seller gets the net sale proceeds.] Similarly, if the case can be settled before filing a claim against the nonperforming seller, buyer’s counsel should still obtain a title report or other review of the public record, to make sure clear title can be conveyed.
Lastly, some real estate disputes may involve the immediate risk of damage to the property or its title. Say the seller is cutting timber on the land he or she already agreed to sell to the buyer. Going to court or filing for arbitration is not going to provide the buyer with an immediate remedy. This is what “provisional process” is for – it allows a party to obtain an injunction restraining the owner from engaging in such conduct during the pendency of the dispute. [Note that Oregon law requires that a bond be obtained by the party seeking provisional relief, just in case the buyer is wrong.]
Filing A Lis Pendens. If a dispute affects title to the property, the OREF Sale Agreement allows the claimant to file a “lis pendens” on the public record against the seller’s property. See, ORS 93.740. This has the effect of “clouding title” to the property by informing all other potential buyers or lenders that there is a prior claim to the property ahead of them. In most cases, this recording will have the effect of preventing anyone else from purchasing the affected property or lending money against it. If a buyer or lender proceeds, notwithstanding the recorded lis pendens, their new interest will be subordinate to that of the party filing the lis pendens. This is the result of the concept of “constructive notice” which gives the world notice of a potentially superior claim that appears on the public record. See, ORS 93.642 et seq.
Statutes of Limitation. All legal claims are subject to various statutes of limitations – i.e., the time within which they may be enforced. Fraud and misrepresentation are 2 years; contracts on real property, 5 years; 6 years on most other contracts and property damage; 10 years for title claims, etc. The only way to stop or prevent the expiration of the applicable statute is by filing a lawsuit in court. The only exception is if there is a written contract providing otherwise. For example, dispute resolution under the OREF Sale Agreement requires mediation and arbitration. [Note; the Sale Agreement form published by the Oregon Realtor Association does not contain such a tolling agreement. This is a serious flaw in that form, in my opinion. More about this in an upcoming post.]
Thus, parties that enter settlement negotiations of a real estate claim that has not yet been filed in court (or arbitration under the OREF Sale Agreement form), must be vigilant. Unless the adverse party agrees in advance to enter into a Tolling Agreement suspending the running of the applicable statute of limitations if settlement discussions continue past the applicable statute of limitations it could result in a loss of the claim. Accordingly, before discussing settlement, it may be prudent to either get a Tolling Agreement from the other side, or file the claim in the applicable jurisdiction, abate or slow it down, during settlement discussions.
Party Dynamics; Needs & Knowledge. Mediation or other structured processes designed to result in settlement are set up so that the parties are in separate rooms – or via Zoom. The mediator is the only party that talks to both sides. In most cases, the parties never speak with each other.
Using good attorneys is essential. They will educate their clients on the process and provide the mediator with a summary of issues and the law. (See, Summary of mediation process here.) Note that some mediators will not mediate a case if the parties are not legally represented. There is good reason for this since unrepresented parties often expect the mediator to educate them, which he/she cannot do. Mediators are neutrals; they cannot legally advise either side.
Sometimes one or both of the parties need information from the other side before making an informed settlement decision. For that reason, an exchange of pertinent documents (aka “discovery”) may be necessary before the case can be successfully settled. This exchange of information can be helpful for the mediator, as well. Most real estate disputes turn on a comparatively limited number of documents and facts. Forget the nuance, blame, or “gotcha” moments; save that for cross-examination at trial.
Bargaining Power. This is a function of time, money, and appetite. The likelihood of a successful settlement can be enhanced when both of the parties have substantially equal bargaining. But that is often not the case. One party may have reasons, disclosed or not, for wanting the matter resolved quickly. If the attorneys can do so, explaining the advantages of cost and time savings, it is encouraged. [Attorneys should not become emotionally invested in their clients’ cases – all decisions must be left to the parties; the attorneys should remain objective and realistic.]
Oftentimes, this is where a good mediator earns their fees. It is easier for the mediator than the attorney to bring the reality of the costs of litigation/arbitration home to a recalcitrant party. For example, it is not unusual for the mediator to ask the attorney, in front of his/her client, how much will the case cost if it cannot be settled? Since attorney fees are frequently a part of most written real estate agreements, the cost of losing in court or arbitration can double. This fact can have an effect of levelling the playing field and is often used by a skilled mediator to encourage settlement.
Experts. Depending upon the nature of the case, sometimes experts may be useful, even during settlement. If justified by the cost-benefit, a good expert report can be useful during settlement discussions. That is not to say the report or even the name of the expert should be initially shared with the other side. But letting the mediator read it in advance may be helpful; the decision to share it with the other side can be decided later. It could prove to be the tipping point in settling the case.
The Settlement Agreement. Successful mediation means nothing without a solid settlement agreement backing it up. Drafting is critical. Even a simple case deserves a detailed agreement. There are several components:
- A fair and accurate recital of the dispute that becomes a part of the terms of the settlement agreement;
- The date, time, and place of payment; if performance is required, exactly when and how it will take place;
- Mutual release terms must be full and complete (if that is the intent); everything should be released from the beginning of time to the present – including unknown claims;
- Dispute resolution. Don’t forget to require mediation before arbitration or litigation if there is a dispute over the settlement terms. Consider including a cure provision so that if default occurs, that party is given notice and an opportunity to cure it.
Conclusion. If 12 -13 days of negotiations could result in the largely successful 1978 Camp David Accords between Egypt and Israel, discussion, mediation, and compromise should work almost anywhere. It certainly should be considered.
No real estate dispute should go to arbitration or court until the settlement options are first vetted by the parties and their attorneys. Even if resolution appears unlikely, the opportunity should be seized. There is a time for everything. Ecclesiastes 3.1.∼Phil