Arbitration: Be there or else
Missing an arbitration hearing could have disastous results

One of the primary benefits of being a REALTOR® is that when a commission dispute arises, the dispute can be resolved efficiently and economically through arbitration before a panel of REALTORS®’ peers. The REALTORS® involved in the dispute are not required to slog through the judicial system to have their dispute resolved by judges or jurors who have little or no experience in real estate. There is, however, one recurring problem that causes difficulty in the arbitration process.

The problem arises when the respondent, i.e., the defendant, just plainly­ does not want to proceed forward with the arbitration. The first time it is scheduled for a hearing, an elderly family member is deathly ill. The arbitration is ­adjourned. The second time it is scheduled for arbitration, the elderly family member has passed away. The third time it is scheduled for arbitration, another family member is sick. The question is then asked: Can the arbitration proceed forward without the respondent? A recent court of appeals case indicates that it may proceed forward without the respondent and the courts will enforce the result.

This case did not involve an arbitration between REALTORS® but, instead, involved arbitration under MAR’s dispute resolution system. Nonetheless, the decision by the court applies directly to arbitrations held by local associations to resolve disputes between REALTORS®.

In this case, the Collinses sold their home to the Dewitts. The Collinses and Dewitts agreed to binding arbitration in the event a dispute arose as to the condition of the property. The purchase agreement included the following arbitration clause:
“ 23. Any claim or demand of Seller or Buyer . . . arising out or relating to the physical condition of any property covered by this agreement . . . shall be settled in accordance with the rules, then in effect adopted by the American Arbitration Association, the Michigan Association of REALTORS® … A judgment of any circuit court shall be rendered on the award or determination made pursuant to this agreement…”

After the closing, the Dewitts apparently moved into their new home and discovered water damage. They filed a demand for arbitration with the American Arbitration Association (AAA). The AAA sent the Collinses a written notice that the arbitration would be held on July 25. Unfortunately, at the time the notice was sent to the Collinses, they claimed they were out of the country and returned home from vacation on July 21. The Collinses further claimed that upon their return, there were several family illnesses and they failed to look at their mail. When AAA proceeded with the arbitration on July 25, the arbitrator found in favor of the Dewitts — not a particularly surprising result since the Collinses were not at the arbitration. After the arbitration was held, the ­Collinses then notified AAA to advise them of their situation. The Collinses sent the arbitrator a letter requesting another hearing, which the arbitrator denied. The Collinses waited several months after the award of July 25 to challenge the validity of the arbitration award in court.

The trial court obviously was ­sympathetic to the plight of the ­Collinses. The Dewitts had proceeded to the ­circuit court to obtain an affirmation and a ­judgment on the award of the ­arbitrator. This is when the Collinses challenged the award based upon their absence from the arbitration hearing. Their challenge was untimely under the Michigan Court Rules. Nonetheless, the trial judge was sympathetic and overturned the award of the arbitrator.

The trial court vacated the arbitration award on the grounds that the arbitrator conducted the hearing before the Collinses knew of the hearing date. The Michigan Court of Appeals found that the Collinses had actual notice and that a demand for arbitration had been made before they left the country on vacation and, in addition, that the Collinses had arrived home from out of the country in time to receive the notice of the hearing date. The court of appeals specifically referenced Section 32 of the Home Buyer Home Seller Arbitration Rules adopted by the AAA and MAR, under which parties consented to notice by mail addressed to the parties’ last known address. Thus, the court concluded that while the Collinses may not have known of the date of the arbitration hearing until they opened their mail, they did receive proper notice of the hearing date. Further, the court of appeals noted that no request was made of the arbitrator to postpone the hearing. Without any such request, the hearing proceeded properly under the rules established by AAA and MAR.

Some REALTORS® may think the result in this case is quite harsh. The Collinses were never offered an opportunity to provide a defense to the Dewitts’ claim of water damage. We routinely advise MAR and local associations to grant a party an arbitration adjournment if it is their first and only request. However, in situations where a respondent continues to make such requests, we advise MAR and local associations to proceed forward with the arbitration even if the respondent does not appear. Some REALTORS® may see this as a deprivation of due process to the ­respondent REALTOR®; however, continued delays in the arbitration process similarly deprive the complainant REALTOR® of due process. In order to keep the system moving, arbitration must, in most cases, proceed forward when scheduled.

Disclosure on sales of vacant land

Most REALTORS® are aware that when a sale involves vacant land it is not necessary for the seller to comply with the Michigan seller’s disclosure law. The seller’s disclosure law only applies to a transfer of any interest in real estate consisting of not less than one (1) or more than four (4) residential dwelling units. The protections afforded all parties by the seller’s disclosure law do not extend to vacant land, commercial property or any other nonresidential property. Nonetheless, many REALTORS® use a disclosure form when they are involved in the sale of vacant land. A recent case by the Michigan Court of Appeals demonstrates that a vacant land disclosure form can be of some benefit if used properly, despite the fact that it is not covered by the seller’s disclosure law.

The Stroupes were selling a parcel of vacant property. They listed their property with a REALTOR®. In September 1999, Edward Podorsek was looking for property on which to build a home. Podorsek entered into a purchase agreement with the Stroupes.

As indicated in the opinion of the Michigan Court of Appeals, while not legally obligated to do so, the Stroupes gave Podorsek a seller’s vacant land disclosure statement. The disclosure statement indicated that the Stroupes knew of no easements on the property. In addition, the disclosure statement provided “this statement is a disclosure of the condition of and information concerning the property known to the seller.” The disclosure statement, like the statutory seller’s disclosure statement, advised Podorsek that the disclosure statement was not a warranty of any kind and should not be considered a substitute for an inspection or warranties that Podorsek might wish to try to negotiate. Further, the disclosure statement provided “the following are representations made solely by the seller and are not the representations of the seller’s agent.”

The purchase agreement was drafted by Podorsek’s agent, not the Stroupes’ agent. It contained contingency provisions, which included a contingency for an independent investigation, a geological inspection and traditional inspection provisions. For whatever reason, Podorsek decided not to have the property inspected.

Approximately one month after entering into the purchase agreement, the Stroupes and Podorsek closed the sale. The Stroupes provided a warranty deed to Podorsek in consideration of his paying them $135,417. Lawyers Title Insurance Corporation, also a defendant in the case, issued a title insurance policy providing Podorsek with coverage in the amount of $135,000. Podorsek took possession of the property at closing.

Shortly after the closing, Podorsek had a conversation with a neighbor. The neighbor advised Podorsek that it was his belief that a drain easement ran across Podorsek’s newly acquired property. The neighbor indicated that the drain was called the “Gerrick Drain.” The neighbor further indicated that the Monroe County drain commissioner had an easement for the drain and also for a portion of Podorsek’s property on each side of the drain for maintenance of the drain. Podorsek contacted the Monroe County drain commissioner and was advised that a drain easement had been established on the property in 1919. The survey of the drain made in 1919 provided that a strip of land on each side of the drain must be taken for convenience in digging and deposit excavations. Unfortunately, the length of the strip of land was not clear since the document said either six feet or six rods.

The words “rods” and “feet” had been typed on top of one another. This was no small issue, as a single rod is equal to sixteen and one-half feet. It would appear from the opinion that the physical existence of the drain easement was not readily detectable on the property purchased by Podorsek.

Podorsek contacted the Stroupes, the title insurance company and the REALTOR® about the drain easement. All of them denied any knowledge of the existence of the drain or the easement. It was uncontested that the Stroupes never disclosed the existence of the drain easement to Podorsek. In addition, the drain easement was not noted on the title policy. The title insurance company denied coverage based on the fact that the drain easement had never been recorded with the Monroe County register of deeds. Instead, it was simply on file at the office of the Monroe County drain commissioner.

Podorsek then sued the Stroupes, the title insurance company and the REALTOR®. In one count, he sued for fraudulent misrepresentation. In another count, he claimed innocent misrepresentation based upon the statements contained in the seller’s vacant land disclosure statement, i.e., there were no known easements. Finally, Podorsek sued the title insurance company for breach of contract. The trial court granted all defendants summary disposition and dismissed Podorsek’s claims against them.
Podorsek’s claims against the REALTOR® failed for some very simple reasons. First, he had no evidence that the REALTOR® had any knowledge of the existence of the drain easement. Further, the court of appeals noted that the vacant land disclosure statement had explicitly stated “the following are representations made by the seller and are not the representations of the seller’s agent.” One of the sellers, Barbara Stroupe, was affiliated with the REALTOR® as an independent contractor. The court found that she signed the disclosure statement as the seller of the property and not as an affiliate of the REALTOR®. Second, an innocent misrepresentation claim failed against the REALTOR®, because there was no privity of contract between the seller’s REALTOR® and Podorsek.

The claims for fraudulent misrepresentation against the Stroupes also failed for a fairly simply reason. In order to prove fraud, Podorsek would have to have shown that the Stroupes intended for him to rely upon a claimed fraudulent misrepresentation.
The trial court and the court of appeals noted that the vacant land disclosure statement specifically stated that it was not based on any expertise of the seller, was not a warranty and should not be substituted for inspection of the property. The court of appeals noted further that the disclosure statement warned that “purchaser should obtain professional advice and inspections of the property to determine the condition of the property.” Based on this language in the vacant land disclosure statement, the trial court and the court of appeals found that the Stroupes did not intend for Podorsek to rely on the disclosure statement.

As a side note, the claims against the title insurance company were dismissed because the title insurance contract provided that easements not shown by public record are not insured against loss.

The MAR hotline receives many calls regarding disclosures that must be made in connection with the sale of vacant land. If REALTORS® are going to use a vacant land disclosure statement, they need to use it effectively as was done in this case. Also, any buyers of vacant land should be offered the opportunity to have the land fully inspected. If they choose not to do so, they risk the consequences. It simply makes good sense.