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Why has mandatory arbitration become so popular in real estate?

On Behalf of | Aug 14, 2023 | Arbitration

With the wild ups and downs in the real estate market these days, mandatory arbitration agreements have widely become just “part of the deal” when a contract is signed.

One of the key advantages of mandatory arbitration is that it can keep a dispute over a real estate dispute out of the overcrowded court dockets. Not only does arbitration provide more privacy than litigation, but staying out of the court system can provide for faster, more efficient resolutions. That can be particularly important if the dispute is causing disruptions in development that are quite costly or the market is volatile and it’s important to resolve disputes before there’s a significant change in interest rates, property values and market interest.

How are mandatory arbitration clauses used in real estate?

There are all kinds of situations in real estate where mandatory arbitration clauses might come into play, such as:

  1. Purchase and sale agreements: When a buyer and a seller enter into an agreement, they might include a mandatory arbitration clause to decide how disputes related to the sale (such as issues with the condition of the property or breaches of contract) will be resolved.
  2. Commercial leases: Landlords and tenants might also include mandatory arbitration clauses in lease agreements to address disputes over diverse issues like rent increases, maintenance responsibilities, security deposit disputes or early terminations.
  3. Real estate agent contracts: Contracts between real estate agents and their clients might contain arbitration clauses to handle disputes arising from commissions, breaches of fiduciary duty or ethics complaints.
  4. Homeowners’ Association (HOA) agreements: Many HOAs include mandatory arbitration clauses in their governing documents to resolve disputes with homeowners over matters such as property maintenance, rule violations, and assessments.
  5. Property management agreements: Owners of rental properties may want agreements with property management companies that include arbitration clauses to handle disputes over management fees, tenant issues and property maintenance.
  6. Real estate development: Developers and investors might include mandatory arbitration clauses in joint venture or development contracts to address disagreements over project timelines, funding and profit distribution.

It’s important to remember that the specific terms and conditions of mandatory arbitration clauses can vary widely. Some clauses may specify the arbitration organization, location and procedural rules, while others may leave those details to be determined at the time of the dispute. Anyone entering into a real estate contract with a mandatory arbitration clause should carefully review the language and consider seeking legal guidance to fully understand its implications.