Purchase agreements used in real estate transactions are intended to protect the brokers and agents who use them. Yet, too many forms encourage the advancements of professional societies, such as attorneys, to the detriment of brokers and agents. This isn’t a mystery, considering who edits them.
Attorney fees provisions guarantee attorneys’ fees in litigation — with more certainty than badly worded broker fees provisions guarantee the broker a fee upon closing.
To include an attorney fees provision is to consider litigation a foregone conclusion (it is not), that time will be invested in defending yourself, and that you and your client will always be on the prevailing side. These presumptions are made with as much irrationality as the inclusion of an attorney fees provision in purchase agreements.
A purchase agreement is a written contract between a buyer and seller. The fact that so many brokers and agents use purchase agreements with boilerplate attorney fees provisions shows how little they know about the consequences of these fee provisions and the related arbitration clause.
Real estate practice and the attorney fees provision
Real estate agreements that may contain an attorney fees provision include:
- purchase and exchange agreements;
- escrow instructions;
- leases and rental agreements; and
- promissory notes and trust deeds.
Those who benefit most from an attorney fees provision include:
- landlords in lease agreements;
- lenders in promissory notes; and
- brokers in listing agreements.
These are the people most likely to sue and prevail on these agreements.
Thus, these classes of litigants seek enforcement of a lease, note or listing, and are likely to want the attorney fees provision to cover their collection expenses. Thus, they get attorney fees if they win, or the person sued gets attorney fees for defending.
Additionally, unless the attorney fees provision specifies that it covers all attorney fees arising out of the subject of the agreement, it will only cover actions on the contract. If the attorney fees provision only enforces the contract, attorney fees to recover for bad conduct (in tort theory), such as misrepresentation or breach of agency duties, must still be paid by the victor. That is, there are still holes in the supposed “safety net” of the attorney fees provision. [3250 Wilshire Boulevard Building v. W.R. Grace & Company (9th Cir. 1993) 990 F2d 487]
Conversely, the attorney fees provision in first tuesday’s forms are of the all-inclusive variety arising out of any action in the enforcement of the agreement.
Include or exclude
Purchase agreements entered into by buyers and sellers exist in a litigation-risk environment. Large amounts of money are involved and occasionally transactions go bad. As a result, brokers need to consider excluding attorney fees provisions from some agreements as a risk reduction strategy.
For example, the California Association of Realtors’ (CAR’s) purchase agreement form contains an attorney fees provision (as well as the publicly unacceptable compulsory arbitration provision).
Conversely, neither the attorney fees provision nor an arbitration provision is included in purchase agreement forms published by first tuesday. [See first tuesday Form 150]
Editor’s note — As a matter of policy, first tuesday’s purchase agreements and addenda have never in over 35 years contained an arbitration provision or an attorney fees provision. This policy is part of a larger effort to reduce the risk of litigation to brokers and agents. Without an attorney fees provision, litigation becomes much less economically feasible for sellers and buyers. And without an arbitration provision, buyers and sellers are protected from the arbitrary perils of — you guessed it — arbitration.
A sizeable difference
For buyers and sellers, attorney fees provisions encourage and promote litigation rather than inhibit it. And when buyers and sellers sue one another over a transaction, brokers are uniformly named as defendants who are called upon to indemnify one or the other party.
Why the concern? The absence of an attorney fees provision in purchase agreements immediately focuses on the amount of monetary recovery available as a result of the dispute, called damages. The amount of any recovery is limited to actual money-based losses on a transaction.
Thus, a money award recovered by a buyer or seller is reduced by the amount of attorney fees paid to pursue the recovery, but only when the purchase agreement does not contain an attorney fees provision. As a result, disputes of any type rarely go beyond mediation, since all parties are inhibited by the inability to recover attorney’s fees.
Without the attorney fees provision, most litigation (or arbitration) will be suppressed as economically infeasible to pursue. Thus, a broker’s risk of becoming entangled in litigation between buyers and sellers is greatly reduced.
The preferred cost of mediation
In mediation, the real estate industry has an organic means of fostering low-cost, low-consequence dispute resolution. Contracts containing mediation provisions intuitively eliminate the “need” for an attorney fees provision. Requiring each party to bear their own court costs discourages complainants from escalating the dispute beyond mediation to full-blown litigation.
Mediators typically charge anywhere from $150 to $600 per hour with a minimum number of hours required. As a further inhibitor of disputes, this cost is shared between the disputants. In contrast, attorney fees for litigation or arbitration hover around the same range per hour and are not shared between disputants.
Best of all, attorney representation is optional in mediation. As the resolution decided by mediation is crafted by the parties in dispute, attorney fees (if an attorney is retained) in mediation are paid for by each party separately, unless agreed otherwise.
If you haven’t done so lately, take a look at a copy of your “old standard” purchase agreement. If it includes both an arbitration provision and an attorney fees provision, seriously consider switching forms. To do otherwise is to risk involvement in litigation or arbitration.