Home purchases are often the most expensive transaction a person can make in their lifetime. With so much money on the line, it’s natural for disputes to arise between buyers and sellers. Most problems are just a simple misunderstanding that can be worked out easily; others can lead to excessively long and costly litigation. This is why almost all purchase contracts will include mediation and aberration clauses. They allow for an easy (and more affordable) alternative to taking things to court.
Here we break down what you need to know about legal disputes in real estate transactions. What causes them, how to avoid them and, failing that, how to resolve them. Whether you’re looking to buy or sell, it’s important that you understand what the law says, as well as what your options are.
DISCLAIMER: This article does not represent any form of legal advice. Please consult with your attorney.
Table of Contents
What Causes Real Estate Disputes?
When it comes to disputes between buyers and sellers, the cause usually boils down to one of three reasons. Those are:
1. Breach of Contract
A purchase and sales agreement is a legally binding contract. If parties to a contract fail to live up to their obligations as outlined or try to back out of the deal without reason, then they can be found in breach of contract. If this were to go to court, the wronged party (the plaintiff) must prove they have fulfilled their contractual obligations while the other party (the defendant) has not.
2. Failure to Disclose Property Defects
New York Law requires sellers to provide buyers with a property disclosure form before they sign the contract. This will outline all known defects in the property. If, after the closing, the buyers discover any defects that were not mentioned in the disclosure form, then the sellers can be liable for damages. However, this will mean having to prove that the seller knew about the defect and did something to prevent the buyer from knowing about it.
Sellers also have the option of giving buyers a $500 credit at closing instead of a disclosure statement. In most cases like this, New York law follows the rule of “caveat emptor” or buyer beware, meaning that it is on the buyer to find any defects. Also, certain types of homes, such as new constructions or co-ops, are exempt from state disclosure laws in New York.
3. Faulty Repairs
It’s common practice for sellers to ask for repairs to be made before the deal can be finalized. However, it sometimes transpires that the repairs were not performed as requested or done badly. In such cases, the documents and correspondence between the parties can be helpful in determining what solutions are available.
Tips on Avoiding a Real Estate Dispute
Avoiding any potential problems, to begin with, is always the best course of action. Follow these tips to give yourself the best protection against any potential problems that could lead to litigation:
- Have your attorney review the contract – The more tightly constructed your purchase contract is, the less room there is for problems. Whether you’re the seller or buyer, have your attorney go over the proposed contract of sale before you sign. Since you need an attorney anyway to close on a sale in New York, this won’t mean a lot of extra work.
- Include contingencies – Both buyers and sellers should have the appropriate contingencies in place to protect themselves should anything go wrong. This way, you’ll already have an established protocol for resolving any issues.
- Include mediation and Arbitration clauses – Along with contingencies, the contract should also include mediation and Arbitration clauses to help resolve any disputes that do arise (more on that below).
- Get a home inspection – Since its buyer beware in New York, it’s entirely on the buyers to determine the state of a property before finalizing the contract. Hire an independent inspector to assess the property and report on any issues properly. If they raise a red flag about any area and offer a more detailed inspection for an extra cost, then you should accept that offer.
How Can You Resolve Real Estate Disputes?
Sometimes, despite everyone’s best efforts, a problem arises, and negotiations break down. The word ‘lawsuit’ begins to rear its ugly head. No one ever likes a lawsuit. They can be expensive and heated affairs that exhaust the finances and patience of both parties.
Fortunately, there are alternatives to litigation. This is where those mediation and arbitration clauses mentioned earlier make an appearance. This is part of a system known as alternative dispute resolution (ADR), which has become a standard in the industry for resolving disputes between buyers and sellers. They offer a way to resolve conflicts in a corporative way without involving courts and costly lawyer fees.
First Alternative – Mediation
This is the first phase of resolving any dispute, mediation. It’s a relatively informal process of dispute resolution which takes place outside the court system. it works by having a neutral third-party (a mediator) facilitate negotiations between both parties to help them find a mutually acceptable resolution to the issues. The whole process is entirely voluntary, confidential, and non-binding. Either party can walk out at any time, and no decisions are legally-binding if both parties don’t agree to them. This creates a non-confrontational atmosphere, which is further helped by the mediator, who is trained to create space for negotiation and find solutions.
The New York City Bar Association makes it clear that the mediator does NOT represent either party. No attorney-client relationship or privilege exists between the mediator and the parties. The mediator’s job is to act as a neutral third-party and assist the parties in resolving their own dispute. Chances are if you’ve already reached this stage, then there must be some tension already with the other party. The mediator can help ease this tension by conduction the mediation in separate rooms for each party. Going back and forth between each one to transmit messages and help them find a mutually acceptable compromise. If a solution can be reached, it will be put in writing and signed to make it enforceable later.
What makes mediation so successful is that it’s non-confrontational by nature. Both parties also have the assurance that giving it a try won’t come back to haunt them if things eventually do move to litigation. All documents and verbal information that one party discloses to the mediator are entirely confidential and cannot be divulged by the mediator to the other party unless authorized. Nor can it be divulged to a third-party unless compelled to by a court order. Also, the mediator cannot be subpoenaed by either party to provide documents or reveal the nature or content of anything discussed during mediation.
While mediation is a lot cheaper than litigation (about 85% cheaper by some estimates), it’s not free. How much it costs will depend on the experience of the mediator and how long it takes to reach a solution. You may be charged an hourly rate or a flat fee, plus an initial filing or processing fee. Both parties will usually agree to divide this cost between them.
Second Alternative – Arbitration
If no solution can be reached, the next step depends on the severity of the situation and the attitude of the parties involved. One side could sue the other and start moving towards litigation. Or, if both parties agreed to it, they can try arbitration.
Arbitration is a bit like litigation in that it’s an adversarial process. Both parties submit statements and documents to a neutral third-party (the arbitrator) and can be represented by attorneys. The arbitrator serves as both judge and jury, who then renders a decision after hearing both parties. Arbitrations can be both binding and non-binding. When they’re binding, the court may review the final decision of the arbitrator. When it’s non-binding, the decision is advisory and only becomes final if both parties agree to it.
Legal disputes can be messy affairs and downright destructive if allowed to lead to litigation. Any reasonable person would want to avoid that, which is why mediation and arbitration are the best alternatives. However, to work, they must be agreed to by both parties. This is especially so for arbitration, which can usually only be entered into if both parties agreed to do so.
The non-confrontational approach to mediation is usually the best alternative. Even if it doesn’t resolve the dispute, it can still be an effective way for both parties to express their feelings and get a clearer picture of the area of dispute, which should allow future proceedings to be smoother and more efficient. As most attorneys will tell you, why litigate when you can mitigate?