The standard California Association of Realtors (“CAR”) contract for the purchase and sale of real estate often contains a clause which requires that a party mediate before litigating as a condition to recovering attorneys’ fees. Paragraph 17A of the standard CAR form for the sale of residential real estate of up to four units provides:
“Buyer and Seller agree to mediate any dispute or claim arising between them out of this Agreement, or any resulting transaction, before resorting to arbitration or court action…. If, for any dispute or claim to which this paragraph applies, any party commences an action without first attempting to resolve the matter through mediation, or refuses to mediate after a request has been made, then that party shall not be entitled to recover attorney fees, even if they would otherwise be available to that party in any such action.”
These same provisions are commonly contained in CAR forms for the sale of large apartment complexes, and similar provisions are included in purchase and sale agreements for commercial and industrial properties as well. This article, although focusing on recent court decisions in the residential area, equally applies to commercial and industrial agreements. California courts will specifically enforce those provisions so long as they are included in the parties’ contracts.
The good news for parties who successfully mediate is their entitlement to recover attorneys’ fees. The bad news for prevailing parties who fail to request mediation before filing suit, or who decline a request to mediate by the other side who is filing suit, is the loss of attorneys’ fees, even when prevailing. Recent cases have strictly enforced this rule.
In 2004’s seminal case, the court strictly enforced the provisions of paragraph 17A. The sellers of a home were sued for specific performance by buyers who claimed the sellers reneged on an obligation. Following the requirements of paragraph 17A, the prospective buyers requested that the recalcitrant sellers mediate. The sellers refused, were sued and while they prevailed on the merits as to liability, they were unsuccessful in their efforts to recover attorneys’ fees. The putative sellers’ defense was they perceived mediation would be unsuccessful. Additionally, they agreed during the litigation to mediate and they had engaged in substantive settlement discussions. The court rejected these facts as not complying with paragraph 17A. Lauding pre-dispute mediation as strong California public policy, the court noted that the parties were only $18,000 apart in failed settlement discussions, but they had generated several hundred thousand dollars in combined legal expenses in litigation. What is noteworthy is the buyers actually filed suit before requesting mediation in order to record notice that a lawsuit was pending. It was the putative sellers’ refusing to mediate which caused the loss of fees under 17A.
This rule was followed in a 2007 case where the putative sellers, defending a specific performance action, had requested the putative buyer to mediate under paragraph 17A. However, the suing putative buyer refused and lost not only the specific performance lawsuit, but was assessed a significant award of attorneys’ fees as well.
Another case in 2008, but regarding nondisclosure of defects, involved an unhappy buyer who hired a private investigator to locate the sellers in order to serve them with a lawsuit. Once the sellers were located, the buyers failed to request mediation before proceeding to court. The good news for the buyers is that they prevailed in recovering $13,000 in damages over nondisclosed defects; the bad news is that their failure to request mediation once their investigator located the sellers and before filing the lawsuit cost them $113, 000 in attorneys’ fees they otherwise would have recovered.
In summary, if paragraph 17A of the standard CAR form is used by the parties for the sale of residential real estate, or if the parties use similar language for the sale of large apartment buildings, commercial or industrial properties, be sure to request mediation before filing suit. As defendant you must agree to a mediation if requested. No matter how correct your legal position may be on the merits, you will lose your right to recover attorneys’ fees as a prevailing party unless the provisions of 17A are strictly met.