By Rob Hofmann

The Court of Appeal (Third Appellate District) has reaffirmed the judicial trend to give great deference to the terms of an executed real property purchase agreement as written, emphatically stating that the pre-litigation mediation provision at issue in Lange v. Schilling (2008) 163 Cal.App.4th 1412 “means what it says and will be enforced.” Substantial conformity with the provision requirements is not enough to qualify to recover attorney’s fees. 

At issue in Lange was an attorney fees award in excess of $80,000 (of the more than $113,000 sought) to the plaintiff purchaser of real property in the construction defect and misrepresentation case, filed against the seller and broker. The amount of damages awarded to the plaintiff was just over $13,000. The defendant broker appealed the attorney fees award contending that the plaintiff buyer failed to comply with the mediation-before-litigation requirement of the form CAR California residential property purchase agreement (“Agreement”) executed between the parties. The appellate court agreed with the defendant.

Paragraph 22 of the Agreement provides: “In any action, proceeding, or arbitration between Buyer and Seller arising out of this Agreement, the prevailing Buyer or Seller shall be entitled to reasonable attorney fees and costs from the non-prevailing Buyer or Seller, except as provided in paragraph 17A.” 

Paragraph 17A states, in relevant part: “Buyer and Seller agree to mediate any dispute or claim arising between them out of this Agreement, or any resulting transaction, before resorting to arbitration or court action … If, for any dispute or claim to which this paragraph applies, any party commences an action without first attempting to resolve the matter through mediation, or refuses to mediate after a request has been made, then that party shall not be entitled to recover attorney fees, even if they would otherwise be available to that party in any such action.”

The plaintiff buyer tried unsuccessfully to locate the seller prior to filing his complaint. This inability to locate the defendant further precluded him from serving the defendant until an investigator he hired located a potential mailing address some 16 days after the complaint was filed. The defendant seller subsequently failed to respond to this service by mail and a default was entered. During subsequent discussions, the plaintiff’s attorney made a written offer to stay the litigation to allow the parties to mediate. The letter concluded by stating that, if the no response to the mediation offer was received, plaintiff would “assume both parties are waiving paragraph 17 of the sales agreement in its entirety.” The parties later stipulated to set aside the default, but no response to the mediation offer was forthcoming and the matter went to trial.

The jury returned a mixed verdict and the trial court concluded that plaintiff was entitled to $80,710.26 of the $113,096.03 in attorney fees he sought. The seller had limited financial resources, so the plaintiff and seller entered into an agreement by which the plaintiff agreed to perfect the judgment against the seller’s broker. The broker then objected to the attorney fees on the grounds that the plaintiff had bypassed the mediation step. The trial court ruled that the plaintiff had substantially complied with the requirements of the Agreement and that the plaintiff’s purported inability to locate the defendant prior to filing suit reasonably justified his failure to mediate. The trial court concluded that it could not say the defendant seller “suffered any prejudice due to the tardy offer to mediate in that, at that time plaintiff offered to mediate, the sellers had not filed any responsive pleading.”

However, the appellate court reversed, ruling that it is irrelevant to whether the plaintiff buyer substantially complied with the requirement of the Agreement. The court stated that “the language of a contract is to govern its interpretation, if the language is clear and explicit, and does not involve absurdity.” Even absent this clear standard, there is a “strong policy in favor of mediation … Had the parties resorted to mediation, their dispute may have been resolved in a much less expensive and time consuming manner. Here, plaintiff spent more than $113,000 in attorney fees to recover a $13,000 judgment. The economic inefficiency of this result may have been avoided … (a)ll he had to do was attempt to mediate with the seller before he filed suit.” Accordingly, the plaintiff buyer was required to pay his own attorney fees. The bottom line is that with a standard purchase agreement, the plaintiff must be able to establish a bona-fide effort to mediate before filing a lawsuit if the plaintiff hopes to recover attorney’s fees.

The purchase and sale of residential real estate is often one, if not the most important, transactions in a person’s life. However, these transactions have become so commonplace that preprinted purchase and sale agreements, such as the California residential property purchase agreement, frequently replace the transaction specific document that would otherwise be prepared by a lawyer. Although these preprinted agreements provide a good preliminary framework for many straight forward transactions, the parties still need to ensure they thoroughly understand their rights and obligations under these form agreements because, as the Lange holding reemphasizes, they will be bound by the terms as written.

Rob Hofmann is an associate with Abbott & Kindermann, LLP, and is a member of the City of Davis Planning Commission, and a member of the San Joaquin Valley Air Pollution Control District Hearing Board.  For questions relating to this article or any other California land use, environmental and planning issues contact Abbott & Kindermann, LLP at (916) 456-9595.

The information presented in this article should not be construed to be formal legal advice by Abbott & Kindermann, LLP, nor the formation of a lawyer/client relationship. Because of the changing nature of this area of the law and the importance of individual facts, readers are encouraged to seek independent counsel for advice regarding their individual legal issues.