Summary of Oregon’s 2021 Real Estate Arbitration Disputes

Introduction. As most Oregon Realtors® know, the OREF Sale Agreement provides that, subject to certain exclusions, all disputes that cannot be otherwise amicably resolved must be first mediated. If that isn’t successful, recourse is through mandatory arbitration. The filing of legal actions in court is not permitted except in cases seeking “provisional process” e.g., for injunctions, restraining orders, and similar matters requesting immediate and extraordinary relief.

The Portland Metropolitan Association of Realtors® (“PMAR”) has its own mandatory mediation process, where disputes involving transactions handled by one or more PMAR Realtors® must first be filed. If mediation is unsuccessful, the only other venue for resolution is through Arbitration Service of Portland, Inc (“ASP”). ASP administers all other non-PMAR mediations for disputes arising under the Sale Agreement.

In some of these seller-buyer disputes, one or both Realtors® may be named because a claimant feels their broker, or the other broker, or both brokers, engaged or participated in activity that caused them damage.

The Sale Agreement’s mediation/arbitration dispute resolution process involving Realtors® is not available to resolve claims for violation of the NAR Code of Ethics. Those are handled at the local Realtor® association level. Similarly, claims against brokers for violation of Oregon’s licensing laws and rules (ORS Chapter 696 and OAR 863) must be filed through the Oregon Real Estate Agency

The 2021 ASP Statistics. Annually, ASP provides PMAR with its arbitration statistics to assist in helping the industry better understand the type of property disputes that end up in arbitration. What follow is a summary of those disputes and Realtor® tips to avoid them.

Seller Misrepresentation Claims. Caveat: This discussion relates only to the topics, not the outcomes. Having several of these claims end up in arbitration does not mean they all resulted in awards for the buyer against the seller.

Unquestionably, over the years, this has been the largest source of claims ending up in arbitration. Moreover, they often include the seller’s broker. This joinder of parties, i.e., naming the seller and their listing agent as co-respondents, should not be a surprise. Oftentimes, it is the listing agent to whom the seller confides, and (unfortunately) the listing agent wittingly or unwittingly, acquires information that provides the basis for a buyer’s claim against that broker.

For example, in completing the Sellers Property Disclosure Statement (“Disclosure Form” or “Form”), sellers turn to their agent to better understand how to answer particular questions: Below are some examples of Disclosure Form questions[1] – coupled with a typical inquiry the seller might have of their broker before finalizing the Form:

Are there problems with settling, soil, standing water or drainage on the property or in the immediate area? “I had some problems last year, but they all got resolved. Do I need to answer “Yes”?
Are there any pending or proposed special assessments? “There have been some recent owner complaints to the HOA about ceiling leaks in their units – but not mine. Contractors are looking at things right now. So far, there have been no assessments proposed, nor assessments made. How should I answer?”
Are there any encroachments, boundary agreements, boundary disputes, or boundary changes? “My neighbor told me he thought my fence was on his land, but he never asked me to move it. We have no dispute. Do I need to answer ‘Yes’”?
Are there any moisture problems, areas of water penetration, mildew or moisture conditions (especially in the basement)? “There are some leaks in the basement during the winter months, but they all go away when the rains stop. Do I have to answer “Yes” even though they are not really a ‘problem’ and are just temporary?”

The “Situational Ethics” Problem. Each of the above property disclosure questions might be answered differently if asked of a seller versus asking the prospective buyer. The seller who does not disclose (or “under-discloses”) may believe they are answering appropriately by strictly interpreting the scope of the question subjectively. E.g., “Yes there was a problem, but it was repaired”; “No, there is no ‘dispute’“; “No, it has not been a problem.”

But how would the seller respond to the following: “If you were a buyer wouldn’t you want to know these things – i.e., letting the buyer decide whether the issue is important in their purchasing decision?”

The minute the listing agent becomes involved in salving the seller’s conscious for not disclosing an issue because the framing of the question didn’t strictly require it, the agent has, figuratively speaking, left their “fingerprints” on the Disclosure Form, which provides a basis for including them in the claim.

The Take-Away. Buyer claims of nondisclosure against sellers and their brokers are primarily – but not exclusively – the result of information the seller could have disclosed but elected not to.

To be fair, however, some fault can be placed on the spectacularly poor and inconsistent drafting of the Disclosure Form – keeping in mind that the text is a product of legislative drafting, not OREF drafting. Time does not permit examples, but there are many.[2]

Also, sometimes seller nondisclosure claims can be traced back to other, less culpable, factors: E.g., (a) Information that was beyond the scope of the Form’s questions; (b) The seller made a good faith error;[3] (c) The buyer already knew or should have known of the defective condition; or (d) Any number of other reasons unrelated to an effort to intentionally conceal information from the buyer.

For listing agents and their sellers, there is One Rule: “If in doubt, disclose.” There is no such thing as saying too much. Or to put a finer point on it, sellers should make the same level of disclosure in answering the form as they would want if they were buyers reading the form. This approach is also known as The Golden Rule. “Disclose, Disclose, Disclose.” Let the buyer decide what is important to them.

Specific Performance Claims. The second largest category in ASP claims relate to buyers asking the arbitrator to require the seller to complete the transaction. This is called “specific performance” which is really the name of the remedy sought for the seller’s breach of contract in refusing to close the transaction.

Since money damages are not really sufficient to fully compensate a prospective buyer, specific performance is the preferred remedy – especially in times of limited inventory when a suitable replacement property is not available. These claims do not normally include the listing broker.

In many specific performance cases, though not all, the reason a seller declines to close the transaction is because they believe they underpriced the property, and/or have a back-up buyer for a better price. Occasionally, sellers decline to sell because they cannot find a replacement home and refuse to close under the misguided belief they can unwind their first transaction.[4]

If the Sale Agreement is clear on its face, the buyer has complied with its terms, and is ready, willing and able to perform, there is a potential claim for specific performance against the seller.

Earnest Money Disputes. The third largest area of contested cases involve earnest money disputes. These situations arise because either the seller or buyer believe the other side breached the pre-closing terms of the Sale Agreement. Examples include the failure to timely deposit (or provide proof of ) funds; the failure to timely secure financing; and untimely rejection of the property inspection report. There are many others.

Although these claims do not normally include a party’s broker, there are things agents can do to reduce such disputes: (a) Know all deadlines; (b) Discuss them with the buyer and seller; and (c) Make sure both agents agree on the same deadline dates.

Why Are There No Seller vs. Buyer Damage Claims In Arbitration? The answer is found in the OREF Sale Agreement – and almost all other contracts for the sale of real property. The earnest money deposited by buyer into escrow is expressly intended to serve as the seller’s agreed-upon “damages” in the event buyer fails to perform. This pre-agreed sum is known as “liquidated damages” i.e., it is stipulated to be the amount the parties have agreed upon in advance, as representing seller’s damages caused by buyer’s default.

This can be a two-edged sword. If the buyer breaches early in the transaction, the earnest money deposit may far exceed seller’s actual damages (assuming seller can quickly resell the property); but if the buyer breaches late in the transaction and the seller had moved out of the property and relocated elsewhere, their actual damages may far exceed the stipulated damages represented by the deposit. In either case, since the sum has been agreed to in advance, with the proper recitals in the Sale Agreement it is the maximum amount seller may recover for buyer’s nonperformance – nothing more.

Conclusion. Are the number of disputes that end up in mediation and arbitration going up, down, or staying the same? That question cannot be answered as it is framed. The reason is that, there should be an inverse relationship between the numbers in mediation and arbitration. That is, the more mediations there are, the fewer arbitrations there should be. To put it another way, mediations, if properly conducted, should have a prophylactic or lessening effect on the number of arbitrations. That has been the case ever since the mandatory mediation clause was instituted in the OREF Sale Agreement circa 1997.[5]

~ Phil

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[1] There are too many to list here. The failure to include them is not to minimize their importance.

[2] Drafting of legislation is often the product of committees composed of stakeholders. How many iterations the final product went through – how many drafters reviewed each one – or how many last-minute changes were made with little or no oversight, is unknown. Clearly, the Disclosure Form contains inconsistent and conflated language. [See discussion at: https://q-law.com/oregon-sellers-property-disclosure-conundrum/]

[3] To be clear, the statute, ORS 105.464, provides that the seller’s answers are based upon their “actual knowledge of the property at the time of disclosure.” Technically, if that knowledge is the result of a good faith error, it cannot (or should not) form the basis of a claim against seller. The representations in the Form are not warranties.

[4] In these situations, sellers should include a well-drafted contingency making the sale transaction subject to the purchase and closing of the replacement property. However, this requires careful drafting; some buyers may not want to wait for the seller’s purchase to close before allowing the contingency to expire. Sellers should be encouraged to consult with qualified legal counsel before entertaining offers.

[5] The reason is because for over 20 years, the mediation clause in the OREF Sale Agreement has contained a provision that if a party failed or refused to mediate first, they could not recover attorney fees later in arbitration, even if they prevailed. This became a significant incentive for recalcitrant parties to first try to settle their disputes in mediation. It worked.

Introduction. Oregon’s property disclosure law was first created in the 1993 Legislative Session – nearly 30 years ago. This was back when the idea of sellers having to “disclose” any information about their homes was a foreign concept. Short of outright fraud, caveat emptor[1] was the rule of the day. Of course, if a seller intentionally misrepresented the condition of their property, it was actionable – but sellers were not then required to make any disclosures, thus leaving buyers to learn as much as they could about the property on their own, before making an offer.

In fact, the concept of “disclosure” was so foreign at the time, that the Oregon legislature gave sellers the right to select between it and “disclaimer”. Thus, residential sellers had a choice between using one of two forms: (a) They could either answer a series of statutory questions about the property (“Disclosure”), or (b) tell their buyer nothing (“Disclaimer”). To lawyers advising their seller-clients, this was a no-brainer – always disclaim.

Both forms permitted buyers a fixed period of time following delivery of the disclosure of disclaimer form to withdraw from the transaction (called the “right of revocation”). This will be examined more closely in Part Two.

It was not long before the Disclaimer option eventually disappeared. Today, the law provides that unless exempted (e.g., new construction sales; sales by court-appointees; foreclosure sales, etc.), all sellers of one-to-four family homes (including condominiums and townhomes) are required to give their buyers a Seller’s Property Disclosure Statement (“SPDS”).

Seller Property Disclosure Today. Fast-forwarding to today, we see that some things have not changed. Most of the questions in the SPDS remain the same; many are poorly worded and suggest that each section was drafted by a separate group, each relying upon their own specialty, such as plumbing, heating, cooling, electrical, land use, title, condominium, etc. There appears to have been no effort to follow uniform style and syntax. Inexplicably, after nearly three decades, most of these questions remain unchanged today.

Some require knowledge of the law: “Is the property being transferred an unlawfully established unit of land?”;
Others require land use knowledge: “Are there any governmental studies, designations, zoning overlays, surveys, or notices that would affect the property?
Some questions refer only to the time of the sale: “Are there any sewage system problems or needed repairs?” This question ignores past problems.
Others refer to conditions that could have occurred at any time over the duration of a seller’s ownership: “Has the roof leaked?”

And perhaps the most open-ended of questions comes out of the blue at the end of the form:

“Are there any other material defects affecting the property or its value that a prospective buyer should know about?”[2] Not only does this question ask how a defect affects the home’s value (while all other questions relate solely to its condition) it requires the seller to know what issues are important to each buyer – metaphoricaly, it asks sellers to become mind-readers.

I do not suggest these topics are unimportant – but believe that many questions are simply beyond the ability of most sellers to answer with certainty. I suspect that less than 20% of sellers can answer all the questions with any degree of confidence.

The only saving grace in the legislation is that it expressly provides that sellers’ answers are based only upon their “best knowledge”- they are not guarantees or warranties. Thus, being wrong is permissible; it does not automatically make a seller liable; liability may only attach if the buyer can establish (through clear and convincing evidence[3]) that their seller knew an answer was false.[4]

And since most real estate listing agents try to avoid having their fingerprints on the SPDS,[5] many balk at answering their clients’ questions seeking direction or interpretation. This leaves sellers on their own.

Lastly, the SPDS form and its enabling legislation contain one glaring 28-year-old error. While the language of the form dictated by ORS 105.464 states at the beginning and end of the document that buyers have “five days” from delivery of the disclosure statement to give notice of their intent to exercise their right of revocation, the text of ORS 105.475(1) says that right commences after “five business days” following delivery.

The 28-Year-Old Mystery. How is it that for over a quarter of a century the Oregon real estate industry has ignored the admitted sloppiness of a form it had a major hand in creating?

The oft-quoted meme used to explain this anomaly is that doing so would open up the form to other stakeholders and consumer advocates (e.g., environmental, zoning, fair housing, conservation, noise pollution, etc.) who would expand the list of required disclosures into an unwieldy amalgam of questions – akin to California’s approach to seller disclosure.

Based upon this rationale it’s a wonder the U.S. Constitution was ever amended. Perfect has become the enemy of good. ~ Phil

[To be continued.]

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[1] “Buyer Beware”

[2] This is like asking a witness on the stand before stepping down: “Is there anything else you have not told the jury that they would want to know?”

[3] The burden of proof for fraud and misrepresentation.

[4] Liability can also attach if the seller “recklessly” made a statement without any basis. This is a more complicated analysis but can be a trap for the unwary seller.

[5] For fear of being brought into a buyer vs. seller claim and accused of having recommended the seller’s answer.

Introduction. The seller’s property disclosure form is second only to the home inspection report in giving buyers important information about the condition of the home they intend to purchase.However, these are two entirely different documents. Continue reading “QUERIN LAW: Tips For Reading Oregon’s Seller Property Disclosure Form”

Real Estate Owned (“REO”). The abbreviation “REO” means “real estate owned.” In banker-speak, it means that the lender has taken the home back from the defaulting borrower – voluntarily or involuntarily – and must now try to sell it to recover the unpaid balance on the loan.

The Bank Addendum. It has been my experience that when banks sell their REO properties, they do so in the following manner: Upon receiving a purchase offer, they counter it with an “addendum.” This document is usually several pages in length, replacing many of the customary terms of the buyer’s offer. While there may be some differences among these bank forms, the one characteristic they all have in common is their attempt to reinforce the notion that the property is being sold “AS-IS.”

Having reviewed a number of bank addendums (technically “addenda”) over the last several months, I have concluded that if we read them at another time, say three, four or five years ago, we would likely have been offended that anyone would think us foolish enough to agree to such harsh terms. But this is today – banks have been taking properties back in droves. These properties must be placed back on the market quickly, and with the least amount of expense. In an effort to reduce future liability, banks have stretched the concept of an “AS-IS sale” to the breaking point. Why? Because they can. Even though it is a buyer’s market in Oregon and elsewhere, banks are selling some of their REOs at very attractive prices. As a result, buyers are generally willing to accept the AS-IS terms in the bank’s addenda.

But Is It Legal? To me, this approach is of dubious legality. Saying so does not make something so. While I cannot presume to know the thinking of those who draft these documents, I suspect some of the AS-IS language is inserted more for psychological affect than substantive effect. As far as I know they have yet to be legally tested in Oregon. Perhaps that means they are working….

Here are a few of the provisions I’ve seen in bank addenda that buyers (and the real estate agents representing them) should be aware of: Continue reading “Bank REOs And Property Disclosure”