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Real Estate Workouts And Dispute Resolution

Real Estate Workouts And Dispute Resolution

Traditionally, real estate industry disputes rely on negotiation for solutions. If negotiation fails, litigation is often initiated. Mediation involves the skillful intervention of a third-party professional to help resolve disputes that arise between two or more parties.

Arbitration, a form of alternative dispute resolution (ADR), is a legal technique for the resolution of disputes outside the courts. The parties to a dispute refer it to one or more persons (the “arbitrators”, “arbiters,” or “arbitral tribunal”), whose decision (the “award”) they agree to be bound. It is a settlement technique in which a third party reviews the case and imposes a decision that is legally binding for both sides.

A workout agreement is a contract mutually agreed to between a lender and borrower to renegotiate the terms on a loan that is in default, often in the case of a mortgage that is in arrears. Generally, the workout includes waiving any existing defaults and restructuring the loan’s terms and covenants. A workout agreement is only possible if it serves the interests of both the borrower and the lender.

A mortgage workout agreement is intended to help a borrower avoid foreclosure, the process by which the lender assumes control of a property from the homeowner due to a lack of payment as stipulated in the mortgage agreement.

At the same time, it helps the lender recoup some of their funds that would otherwise be lost in the process. The renegotiated terms will generally provide some measure of relief to the borrower by reducing the debt-servicing burden through accommodative measures provided by the lender. Examples of relief can include extending the term of the loan or rescheduling payments. While the benefits to the borrower of a workout agreement are obvious, the advantage to the lender is that it avoids the expense and trouble of payment recovery efforts, such as foreclosure for workouts in real estate or a collection lawsuit. Other types of workout agreements can involve different kinds of loans and even involve liquidation scenarios. A business that becomes insolvent and cannot meet its debt obligations may seek an arrangement to appease creditors and shareholders.

For borrowers, general best practices to consider when negotiating, or thinking about negotiating, a workout agreement with a lender includes the following:
• Providing ample notification: Giving the lender advance notice of an inability to meet any and all debt obligations is a good courtesy to extend. Most lenders will likely be more accommodating when borrowers seek a workout agreement if they are aware that default could be an issue. Providing notice engenders confidence that the borrower is on top of their loan management and interested in being a reliable business partner whom the lender can trust.
• Being honest and flexible. A lender is not under any obligation to restructure the terms of a loan, so it is incumbent on the borrower to be honest, direct, and flexible. However, the lender will likely want to limit its losses and maximize recovery of the loan, so it is likely in the lender’s best interest to help the borrower to the extent that it can.
• Considering the credit score and tax implications. Any type of adjustment to the terms of a loan in a workout scenario could negatively affect the borrower’s credit score, though likely not as badly as a foreclosure would. With regard to taxes, the Internal Revenue Service (IRS) typically treats any loan reduction or cancellation as taxable income, which means the borrower could end up owing a larger tax amount in the year that the workout agreement goes into effect.

Real estate disputes are legal conflicts that involve real property (i.e. property that is affixed to the land or a piece of land itself, as opposed to personal property). These types of disputes can involve properties that are worth large amounts of money. Many of these disputes can take a long time to resolve, and may involve many financial/court resources. Thus, it is often common for people involved in a real estate dispute to seek alternative forms of dispute resolution. For instance, many real estate disputes involve a breach of contract when it comes to the sale of property. In such case, both real estate laws and contract remedies may apply, thus making the situation more complex.

How to Resolve Real Estate Disputes

In most cases, a damages award will resolve a real estate dispute. In a legal case, a damages award serves to compensate the non-liable party for losses. Other forms of resolving real estate disputes include:
• Injunctions (for instance, to cease additional construction efforts, etc.)
• Mediation or arbitration (this involves a neutral party to help facilitate discussions between the parties)
• Various fines or fees (these are common for city or state zoning/land use violations)
• Specific performance (i.e., requiring one party to perform their contract duties)
• Various other remedies, such as a judicial lien on the property
Whether you can take advantage of dispute resolution depends on the type of conflict involved. For instance, in a breach of real estate contract claim, the party may need to choose between a monetary damages award and specific performance. With mediation, the parties might be able to reach a conclusion based on their negotiations during mediation meetings. Also, state laws might influence which types of remedies are available. Real estate disputes might involve a number of possible legal remedies. You may need to hire an experienced real estate attorney if you need help with any type of real estate conflict. Your attorney can research the laws in your area and can help determine your course of action. Also, your attorney will be able to represent you during court meetings and hearings if needed.

Mediation and Arbitration

Mediation and Arbitration are forms of alternative dispute resolution (ADR) that are intended to avoid the high cost and unpredictable outcome that could result from a lawsuit. Both mediation and arbitration are private forms of dispute resolution. This means that, unlike a court case, they are not a matter of public record. This confidentiality may be an extremely important feature to one or both of the parties involved in the dispute.

Mediation and arbitration can also allow the parties to establish their own ground rules for settling their dispute, including what types of evidence can be presented, what kinds of experts can be consulted, and the concepts on which the final agreement or decision will be based. Of the two, mediation is a more informal process for resolving a dispute. The mediator is a neutral third party who helps the parties negotiates a resolution to their dispute. In mediation the parties are responsible for coming to an agreement; it is not the mediator’s job to make or impose any decisions on the parties. The mediator listens to both sides and offers suggestions that are supposed to help the parties come to a resolution. The advantage to mediation is that, since both parties participate in resolving the dispute, they are more likely to carry out the settlement agreed upon. A disadvantage to mediation is that the parties may not be able to come together on an agreement and will end up in court anyway.

Arbitration is a more formal process for resolving disputes. Arbitration often follows formal rules of procedure and the arbitrator may have legal training that a mediator does not. The arbitrator is a neutral third party, but should have some expertise in the area that is the subject of the dispute. The parties should agree on who the arbitrator will be or on how he or she will be selected. Unlike a mediator, the arbitrator has the authority to make determinations and decisions that are binding on the parties. The arbitrator’s job is to listen to both sides and then make a decision that is mutually binding on both parties. Arbitration avoids the risk that the parties won’t agree and will end up in court anyway because the arbitrator makes the decisions and they are legally binding. However, the disadvantage of this is that one or both parties may be more dissatisfied with the result.

Both processes have their advantages and disadvantages. The main advantages they both have over a trial are the savings of cost and time, and a greater degree of predictability in the outcome. For a small business owner these could be extremely important considerations. There are also potential disadvantages to using mediation and arbitration. Since these alternative procedures are not bound to follow legal precedent in coming to a decision, parties cannot count on legal precedent to be determinative of the result. The parties may also have difficulty choosing a mediator or arbitrator that they are truly satisfied will be neutral or impartial. Pursuing a lawsuit can be costly. Using mediation, two or more people can resolve a dispute informally with the help of a neutral third person, called the mediator, and avoid expensive litigation. Most mediators have training in conflict resolution, although the extent of a mediator’s training and experience can vary considerably and so can the cost. For instance, hiring a retired judge as a private mediator could cost you a hefty hourly rate. By contrast, a volunteer attorney might be available through a court-sponsored settlement conference program or the local small claims court for free.

The Role of the Mediator

Unlike a judge or an arbitrator, the mediator won’t decide the outcome of the case. The mediator’s job is to help the disputants resolve the problem through a process that encourages each side to:
• air disputes
• identify the strengths and weaknesses of their case
• understand that accepting less than expected is the hallmark of a fair settlement, and
• agree on a satisfactory solution.

The primary goal is for all parties to work out a solution they can live with and trust. Because the mediator has no authority to impose a decision, nothing will be decided unless both parties agree to it. The process focuses on solving problems in an economical manner for instance, taking into account the cost of litigation rather than uncovering the truth or imposing legal rules. That’s not to say that the merits of the case aren’t factored into the analysis—they are. The mediator will assess the case and highlight the weaknesses of each side, the point being to hit home the risks of faring far worse in front of a judge or jury, and that the penalty or award imposed will be out of the control of the litigants.

Types of Problems Solved With Mediation

Anyone can suggest solving a problem through mediation. Neighbor-to-neighbor disputes or other personal issues can be resolved in a few hours without the need to initiate a lawsuit. When litigation has commenced, it’s common for courts to require some form of informal dispute resolution, such as mediation or arbitration, and for a good reason—it works. Examples of cases ripe for mediation include a:
• personal injury matter
• small business dispute
• family law issue
• real estate dispute, and
• breach of contract

The length of time it will take to solve the problem will depend on the complexity of the case. Somewhat straightforward cases will resolve in a half day. More complicated cases will require a full day of mediation, with the negotiations continuing after the mediation ends. If the mediation doesn’t settle, either side can file a lawsuit or continue pursuing the current case.

Stages of Mediation

Many people think that mediation is an informal process in which a friendly mediator chats with the disputants until they suddenly drop their hostilities and work together for the common good. It doesn’t work this way. Mediation is a multi-stage process designed to get results. It is less formal than a trial or arbitration, but there are distinct stages to the mediation process that account for the system’s high rate of success.

Stage 1: Mediator’s opening statement. After the disputants are seated at a table, the mediator introduces everyone, explains the goals and rules of the mediation, and encourages each side to work cooperatively toward a settlement.

Stage 2: Disputants’ opening statements. Each party is invited to describe the dispute and its consequences, financial and otherwise. The mediator might entertain general ideas about resolution, as well. While one person is speaking, the other is not allowed to interrupt.

Stage 3: Joint discussion. The mediator might encourage the parties to respond directly to the opening statements, depending on the participants’ receptivity, in an attempt to further define the issues.

Stage 4: Private caucuses. The private caucus is a chance for each party to meet privately with the mediator. Each side will be placed in a separate room. The mediator will go between the two rooms to discuss the strengths and weaknesses of each position and to exchange offers. The mediator continues the exchange as needed during the time allowed. These private meetings comprise the guts of mediation.

Stage 5: Joint negotiation. After caucuses, the mediator might bring the parties back together to negotiate directly, but this is unusual. The mediator usually doesn’t bring the parties back together until a settlement is reached or the time allotted for the mediation ends.

Stage 6: Closure. If the parties reach an agreement, the mediator will likely put its main provisions in writing and ask each side to sign the written summary of the agreement. If the parties didn’t reach an agreement, the mediator will help the parties determine whether it would be fruitful to meet again later or continue negotiations by phone.

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Michael R. Anderson, JD

Ascent Law LLC
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States

Telephone: (801) 676-5506
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