Real estate agents often question what rights and remedies they may have against the seller in the event of a non-disclosure claim. In many home sales, the buyer, seller and agent sign an arbitration agreement requiring that claims go through arbitration rather than litigation.
Many buyers, sellers and real estate agents do not fully understand the real estate arbitration process; this article provides some basic information.
To arbitrate or not to arbitrate
The first question to ask is whether or not an arbitration agreement was signed. If an arbitration agreement was not signed, the buyer or seller has options (including a formal lawsuit) which are beyond the scope of this article. If an arbitration agreement was signed, the buyer and seller must use the arbitration process to resolve the dispute.
Commencement of claims
Most arbitration agreements contain a time limitation within which claims for non-disclosure must be commenced. Typically, a buyer who discovers undisclosed issues has 18 or 24 months from closing to commence a claim against the seller, or risk losing such claim entirely; exceptions are extremely limited.
The arbitration process is started by submitting a “Demand for Arbitration” with the arbitration service who then serves a copy of it on the seller and/or real estate agents involved. Starting arbitration can be done in a formal or informal fashion. In our experience, starting the arbitration in a more formal fashion can lead to better results at the arbitration hearing because it puts the opposing side on notice of the seriousness of the issues, and it helps the arbitrator have a better understanding of the nature of the claims involved.
The arbitration hearing
Typically, an arbitration hearing will be scheduled within 90 days from the initiation of the arbitration process. The arbitration hearing usually occurs at the subject property. Both sides bring witnesses necessary to prove their claims and/or defenses in the case. The parties also may submit documents to help tell their side of the story, such as photographs, repair estimates, opinions from experts, etc. For a buyer, this may also include evidence of past repairs, or similar evidence intended to show that a seller had knowledge of a particular issue in the property, but failed to disclose it.
While there is no specific requirement for what type of evidence needs to be submitted, a well-organized presentation can be a significant factor in whether arbitration is won or lost. It is very important to understand the types of claims and defenses made in the arbitration process and submit evidence relevant to those issues. Submitting information in a three-ring binder before the arbitration hearing can help the arbitrator understand the issues. Usually, the first time the arbitrator will hear of the claims will be on the day of the arbitration hearing. Most arbitrators find it helpful to have the information organized and a quick means of referring to important documents during an arbitration hearing.
In addition, submitting formal legal documents in connection with the arbitration process, including pre-arbitration memoranda, witness lists, exhibit lists, etc., can reinforce the seriousness of the claims/ defenses, the level of organization and attention to detail, as well as provide the arbitrator with an overview of the case and an outline of the evidence and documents which will be presented.
Sometime after the hearing, usually within in 90 days, the arbitrator will issue a ruling on the claims. Under Minnesota law, such a ruling is binding upon both parties and there are limits to disputing a decision of an arbitrator.
Common pitfall of arbitration participants
The most common pitfall for participants in the arbitration process is a lack of understanding and preparation for the hearing. As a claimant in the arbitration, the buyer must prove essentially two items: (1) that the seller knew or should have known the condition which was not disclosed and therefore has “liability” to the buyer for failure to disclose such condition; and (2) that the buyer has suffered some sort of damage as a result.
The claimant in arbitration usually has an understanding of what is needed to show that a seller failed to disclose a condition. Less understood is the concept of damages in arbitration. Most people mistakenly believe that submitting a repair estimate alone is sufficient to show damages as a result of non-disclosure. Rather, Minnesota law requires that a party who claims to be damaged by a non-disclosure show a difference between what they paid for the property and the actual value received. While this could be proven by repair estimates, it is not always the best way to do it.
Understanding the legal requirements and the arbitration process overall are key to a successful outcome whether pursuing or defending against such claims.
Christopher R. Jones represents property owners, contractors, subcontractors, suppliers and business owners in a variety of transactional matters and disputes including real estate arbitration, non-disclosure claims, and construction defect issues. In his real estate practice, Chris assists both buyers and sellers in real estate misrepresentation cases related to the sale of real property. He frequently teaches seminars for real estate agents, as they are usually the first point of contact when a problem arises. Chris can be reached at [email protected] or (952) 746-2156.
This article was originally published in Vol. 4 No. 6 of the Twin Cities edition of Real Estate Agent Magazine and is republished with permission.