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Real Estate: Pre-Litigation Mediation

Issue

After being rejected for a mortgage loan, how did a husband and wife interested in purchasing a property from a national homebuilder resolve their dispute with the builder over the return of their earnest money deposit?

What Happened?

Motivated to purchase a home in one of the builder’s new residential developments, the buyers made a substantial earnest money deposit on the property.  The couple also signed a purchase agreement containing a separate promissory note, contingent upon the couple’s ability to obtain a mortgage loan.  When the couple’s loan application was denied, however, the builder refused to cancel the purchase agreement and promissory note, and further refused to refund the earnest money deposit.  Instead, the builder offered to apply the deposit to another house if the couple agreed to enter into a new purchase agreement and release the builder from all claims relating to the initial agreement.

Special Considerations

  • The parties’ purchase agreement provided for all disputes to be settled by arbitration, waiving all trial rights in court.
  • The couples’ earnest money deposit made up a substantial portion of their liquid assets, such that they could not afford to engage the builder in time-consuming and expensive arbitration.
  • The mortgage company that denied the couple’s loan was the homebuilder’s affiliate.

How Did PREMi Help?

  • The parties came to the mediation table looking to resolve their dispute quickly and inexpensively rather than throw time and money at formal arbitration.
  • The PREMi mediator focused the parties on the express language in the documents and the actions of both the builder and its lender affiliate, putting aside other facts and allegations that would have sidetracked the mediation.

What Was the Outcome?

With persuasion and guidance from the PREMi mediator, the parties reached a favorable resolution that included:

  • Recognition by the homebuilder that there was substantial risk of significant expense and an adverse result if the matter proceeded to arbitration
  • The homebuilder’s full refund of the couple’s earnest money deposit
  • Nullification of the promissory note and purchase agreement
  • Payment from the homebuilder for the couple’s legal expenses
  • The couple’s agreement not to publicly disparage or malign the homebuilder

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Disclaimer: This summary is illustrative of the types of cases and the manner in which the PREMI associate dealt with the matter. Care has been taken to avoid disclosure of sensitive or confidential information.