It’s worth trying ADR to save real estate relationships

How alternative dispute resolution can preserve vital real estate relationships

Originally Published by Housing Wire on June 26, 2024, 9:30 am By Rich Lee

My wife and I have worked with the same real estate agent to buy and sell several homes, and we’ve referred her to help more than a dozen friends with their home transactions. This is a small example of a big truth about real estate: it’s a relationship business.

In my career as an attorney, I’ve seen how legal disputes can sink relationships fast and forever. Real estate companies and professionals have a fighting chance to salvage these critical business assets if they use alternative dispute resolution (ADR) for routine business conflicts. And let’s face it, most business conflicts are routine unless one side starts playing games.

Implemented smartly, ADR offers litigating parties an expert mediator or arbitrator to listen to each side’s story and either guide them to a workable settlement (mediation) or make an informed, relatively quick decision about who is legally right (arbitration). As a lawyer, I’ve seen what this process can do to lower the litigation temperature and focus on the merits of a conflict with an aim to move beyond it. Even if a relationship is strained beyond the parties working together again, ADR can reduce the animosity and resentment that can linger after a legal fight. It also can save time, energy and money, and because it’s private, it can prevent or limit bad publicity.

ADR can be ideal for common real estate disputes, like those over commissions between brokerages and their agents, or between competing brokers—or when buyers or sellers claim their agents breached their fiduciary duties.

In these disputes, the parties traditionally had the following choices.

• Option 1 is to walk away, gritting their teeth and swallowing whatever costs that come with accepting the unacceptable. One of those costs, surely, is never again doing business with the other broker, agent, buyer, or seller.
• Option 2a is going to court, where gamesmanship runs rampant, and spending a small fortune filing enough papers and document requests – or defending against these filings and requests – that make things so miserable that the two sides ultimately agree to settle .
• Option 2b is going to trial, which can take two years just to get to this stage and cost even more—with only a 50% chance of prevailing.

ADR provides an Option 3 that enables each side to present their case and—if the process is set up wisely—empowers a neutral to remove the gamesmanship of the courts and legacy arbitration systems that turns litigation into an all-out war. Eschewing doorstop-size briefs and demands for terabytes of emails, an empowered ADR provider following a results-oriented protocol will focus on the merits of the argument and, if mediation is impossible, expeditiously deliver an answer so each side can get back to its business.

To make the most of this third option in real estate, the mediators or arbitrators need to understand the relevant state’s real estate law. It’s not good enough to just understand basic contract law. Many states’ court systems have built deep bodies of laws and court decisions regarding fiduciary duty and other issues that come up in real estate. Given that ADR is supposed to save time and money, no one wants to spend either educating the neutral party.

In some contexts, legal advisers to real estate parties may feel more comfortable taking their matters to court rather than arbitration because they want to retain the option of appealing a bad result. This makes sense for major cases in which existential sums of money are at stake, or a precedent or other legal decision could doom one side’s ability to conduct business.

But in routine matters, in which the stakes aren’t high enough to risk blowing up relationships between referral sources and trusted real estate advisors, ADR is worth trying. I’ve seen how litigation can suck the energy out of a company, its executives, and employees, and it’s often not worth the trouble. They try to compartmentalize the angst, but it will find a way to bleed into current projects and future planning.

Most concerning in a real estate context, litigation can distract from nurturing relationships with clients and colleagues. That cost may not be sustainable, especially in this business.

For more check out Real Estate + ADR, a Perfect Pairing

Takeaways: 

• ADR can lower the temperature of legal conflicts.
• Because real estate depends on relationships, and relationships are at risk in traditional litigation, ADR is worth trying for routine matters.
• An ADR provider needs to empower its neutrals to limit discovery, focus on the dispute’s merits, and avoid getting sidetracked by major discovery requests and irrelevant arguments.
• An ADR neutral handling real estate matters should be well-versed in a state’s real estate precedents and body of law. No one wants to educate the arbitrator.

 

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