Arbitration will work for Defaulted Real Estate Transactions
This is a companion article to the one on Mediation.
The Spring GTA real estate market saw a sudden and unexpected increase in prices, followed by an equally abrupt and sudden decrease in prices. This meant that many Buyers couldn’t close their deals. The mortgages couldn’t be arranged for the prices they expected and this led to defaults.
There are several factors in play:
- Did they have to close?
- Did they have the right to walk away from the deal?
- Were they properly protected in the transaction?
- Did they receive good and proper advice from their lawyers, mortgage brokers and real estate agents?
- Do they lose their deposit?
- Do they have to pay the Seller the differential in price (lost value)?
- Do they have to pay real estate commissions?
- Do they have to pay other costs and carrying charges to the Seller?
Where does the Buyer go for advice? This is difficult. Everyone has their “canned” approach to resolving these sorts of issues. A lawyer might suggest litigation, but that’s expensive. Someone else might suggest just “chalking this up to experience” and moving on. Which approach is right? Is there somewhere in between?
MEDIATION is a potential Solution
We discussed that previously.
ARBITRATION is another Alternative Solution
Arbitration is another way to resolve this sort of dispute. Essentially, this is “Private Court”. There’s an Arbitration Act in Ontario which sets out some of the ground rules. It can be either “binding” or “non-binding”, but what’s the point of non-binding Arbitration, that’s just the same as mediation.
The correct approach is “binding” arbitration or having your own “Private Court”. When I say “private”, it means that your case is heard in private and the results are also private. So, really that might be an advantage in some cases. For large commercial entities when they run into a dispute with a friend or colleague, this is the route. Consider a large commercial Landlord with its long term prime Tenant of thirty years. They need a new rental rate. They can’t agree, but they can certainly agree that they don’t want their differences of opinion aired in the public.
The actual location is selected by the parties. It could be a seminar room in a hotel or a boardroom in a law office or private suite of offices.
The essence of it, is that it will be a neutral location, and not to the advantage of either party.
All costs of the arbitration process are to be allocated equally to the parties. Both parties are then committed to the outcome. They are sharing the expenses equally.
Selection of Arbitrators
If both parties have the same person in mind, then that’s a good choice. They should be looking for someone with experience and expertise in the field.
This is either the task of the parties, or they can go to the three person Panel. This means that they will each nominate one person and the two nominees will select the third. This person will be the Chairman of the Arbitration Board (Panel or Committee, as that expression may be used).
Here, each party will pay their own nominee and will pay one-half of the costs of the Chairman.
Each of the parties will ordinarily be entitled to legal representation throughout the process. They will each pay for their own lawyers.
Exchange of Documents
This can be handled in one of two ways. There’s the approach of each party preparing and submitting their own document Brief, or there is the Joint Submission. The separate brief route is quicker.
All parties will have to agree upon a date. There may be witnesses to call, so they should be available too. With lawyers, parties, witnesses, and Panel members this could easily be three months out. But, while that may seem long, compared to litigation it is very efficient. A trial date in a civil litigation matter will be 2 years out, after it has been set down for trial. That’s often 3 years after the case got going in the first place.
With the three person Panel, you would usually have two biased and committed members followed by one impartial Chairman. Votes are equal. The majority carries the decision. This means that the Chairman’s vote is absolutely “key”.
You will also appreciate that the Panel could be bumped up to five members with three being impartial, or at the outset, you could actually have started out with three impartial members.
Hearing Recorded with Transcripts
This is a decision that will have to be made. If the hearing goes on for several days over an extended period of time, then it makes sense to have a Court Reporter. They are available and they will cost money, allocated one half to each of the parties.
Selection of the Chairman
The Chairman should have some expertise in the particular field. In our examples, this should be a real estate broker with years of experience in the field. They should know and understand the documents, the process and the applicable law to be applied.
The problem is that the real estate broker may have little or no experience with the procedural aspects of the arbitration process. That’s not good, and might come back to “backfire” against the parties.
The obvious solution here would be a lawyer who is both knowledgeable and experienced in conducting hearings. The aspect being sacrificed is someone who knows about the real estate process. A lawyer who knows real estate litigation and also knows arbitration would be ideal.
By far, the least expensive route would be to have one Chairman, one Arbitrator rather than two. You could have two Co-Chairs, one for content and one for procedure, but that’s double the expense.
Once the decision is made it is enforceable as if it were a Judgment of the Superior Court of Justice. In fact, it can be filed and enforced in Court in the same manner.
There generally are no appeals in the Arbitration process. That’s the purpose of the system. The parties already selected their own “judge” who is knowledgeable in the area. So, they agree in advance to accept and abide by the decision.
Advantages – Time and Money
The comparable system is civil litigation. It can take several years. If we had a case start today, it would easily be three years for discoveries and motions, two years for trial, one year for appeal and a further two years for a further appeal. That’s five full years in the process. That assumes that there are no settlements and neither party runs out of money.
With Arbitration, we could have a decision in three months.
The costs associated with the litigation route are really the lawyers. Hourly billings and the extended length of time involved. The sad part is that the lawyers are not being paid for presenting the case, they are being paid to wait in the hallways while someone else’s case in being heard. So, when you simply book a seminar room in a hotel, that’s it. That’s the date, no waiting and no expensive fees.
A case of a defaulted real estate deal should take no longer than one day, in fact, four hours should be enough. That amounts to one day of costs per party and one half day of shared costs.
Arbitration is efficient and reliable.
Brian Madigan LL.B., Broker