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Second in a Series about the Real Estate Downturn and Mediation

Since the last article in this series was published in the December 2007 edition there has been more bad press not only about the deepening housing market problem, but also for commercial real estate.

The Los Angeles Times published recently a long article about financing effects on the commercial real estate market even though office buildings, apartments, industrial facilities, and warehouse space are “economically full”, at historical low vacancy rates, and high rent.

The commercial market slight down turn is both psychological, and to a certain extent the result of less capital available in multiple forms for building acquisition.

Some major real estate holders have withdrawn their buildings from the market place.

This current commercial and residential “slide” continues to cause more need for mediation and arbitration, both, or one or the other, which is built into most sale contracts.

A typical Real Estate Sales Deposit case is outline below on a residential sales transaction resulting in a dispute. Only the size of the sales price and deposit make the case unusual, other than the transaction and resulting dispute is quite common in today’s real estate market.

A property was listed for sale for $11.5 million just before the avalanche of bad publicity hit the national media outlets in an exclusive portion of a large metropolitan area.

The buyer deposited into escrow $350,000 using the standard pre printed real estate Sales and Escrow Instruction Contract in California with brief exhibits attached.

During this period the media began speaking and publishing daily information about a credit crisis in the Sub Prime market and the first major holder of Sub Prime securities took a large public loss in the mid billion-dollar range.

One of the clauses in the Sales Contract was the sale was contingent on the buyer obtaining financing. One assumes, at this point in this case outline, that normal good faith was used by the buyer to obtain said financing.

Prior to the expiration of the time called for in the Sales Contract to obtain this purchase financing the Claimant/ Buyer wrote the Respondent/Seller and the escrow holder that he could not obtain financing, and he wanted back his deposit of $350,000.

The Respondent Seller, an attorney, wrote the Claimant/Buyer and the escrow holder that the funds were not to be disbursed, but rather returned to the buyer as a forfeited deposit in lieu of damages.

The Sales Contract also had a provision about liquidated damages in the event of a breach of the sales contract by either disputant.

The escrow holder complied with disputants request to disburse the deposit by doing nothing, but holding the funds until the dispute was settled, and until both parties agreed in writing on the method of disbursement.

The sales contract called for mediation first and then arbitration.

During this period buyers became less and less available, financing for luxury homes became difficult because lenders were unsure, in general, about their underwriting and loan pricing, and sale prices on listings began to slide downward.

Usually it is difficult to get both disputants to comply with dispute resolution; however the courts will usually force both, rather than hear the case and clog the judicial system.

In this case both parties agreed to mediate the dispute over the purchase deposit and a mediator was selected.

This was after some difficulty because the Claimant/ Buyer resides out of state along with his lawyer who attended the mediation. The Respondent/Seller was a lawyer stating he was attending the mediation as a non-lawyer.

The Claimant/Buyer thought that one and one half hours would be sufficient for the mediation and the Respondent/Seller thought four hours.

Four hours was selected by the mediator, and a location selected in a hotel conference room close to an airport convenient to both disputants and the mediator.

After the mediator made some standard mediator remarks regarding how the mediation would take place, and some rules, and procedural quidelines the mediation began.

The Claimants/Buyers case was based upon his facts that he had 20 days to obtain financing and if not obtained could cancel the contract by written notice prior to the expiration of the twenty days, which he did, and therefore wanted his deposit money returned.

The Respondents/Sellers case was based upon a number of his facts.

He asserted that the Claimant/Buyer and the Claimants/Buyers Real Estate Broker knew each other before the Claimant/Buyer started looking to purchase a home, and both fraudulently misrepresented the Claimants/Buyers ability to obtain financing.

If the Respondent/Seller had known, he claimed, that the financial ability to deliver the purchase financing by the Claimant/Buyer was misrepresented he would not have granted such a short period of time (20 days) to provide the financing called for in the Sales Contract.

The Sales Contract had some financing detail contained in it that called for the Claimant/Buyer to obtain a $4 million first mortgage, and pay the balance of the purchase price of $ 7.5 million at close of escrow. The Claimant /Buyer was an out of state Investment Banker.

After defining the issues, which were financial, to a certain degree emotional and physiological the mediator had a number of caucus’s with each party.

The disputants were both very entrenched in their positions.

Sometimes having a lawyer on one side of a dispute and another lawyer representing the other party in a dispute prolongs mediation because of the training and practice lawyers receive to rebut more comments than an untrained person.

The opposite of the above is both lawyers were businessmen, and in the end practical about their positions.

The documents and facts as presented by the Claimant/Buyer regarding financing, and performance issues were in the mediators private opinion were weak, and the facts presented by the Respondent/Seller regarding his allegations were also weak, in the mediators private opinion, and not supportable by facts because a number of the alleged misrepresentations made by the Claimant/Buyer to Respondent/Seller were verbal.

As the fourth hour of mediation began, and after a few more caucus’s both sides brought their unmovable positions to an end, and realized that further steps in the dispute beyond mediation would probably be binding Arbitration that could result in an all, or nothing, “roll of the dice”.

At the conclusion of the mediation both parties agreed that the Buyer/Claimant would receive $250,000 of his deposit returned, and the Seller/Respondent would receive $100,000 in liquidated damages.

The settlement was documented by the mediator, and after some minor changes by both lawyers the agreement was signed and sent to the escrow holder.

A lesson learned in the above is no matter how entrenched and experienced both sides of a dispute may be both time, and persistence by the mediator sometimes causes unexpected results three quarters of the way through a mediation.


David W. Dresnick

  During his career, Mr. Dresnick was successfully responsible for major marketing efforts and plan implementation that involved profit and loss, employees, and balance sheet reengineering, including, finance, operations, strategic and short term planning, human resource, legal, consumer servicing, and Chief Executive of several companies with rapid growth and operational… MORE >

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