We are often asked by real estate brokers and agents what happens when one party to a real estate purchase contract, such as the buyer, initials the arbitration clause, but the other party, such as the seller, does not initial it. Put another way, if one party agrees to the arbitration clause but the other party does not, is the arbitration clause enforceable? This question is still unsettled by the California courts, but a statute and two cases provide helpful guidance in this area.

California Code of Civil Procedure §1298 addresses arbitration clauses in real estate purchase agreements. This section requires that an arbitration clause in a real estate purchase contract must include certain language and allow the parties to separately indicate their assent or nonassent to the clause. However, the statute does not say whether an arbitration clause is enforceable when one party agrees to the clause, but the other party does not. Thus, we must examine applicable case law.

One case that addressed the question is Grubb & Ellis Co. v. Bello (1993) 19 Cal. App. 4th 231. In this case, a buyer, Bello, and a broker, Grubb & Ellis, entered into a listing agreement. Bello initialed the arbitration clause, but Grubb & Ellis did not. Grubb & Ellis sued Bello for failure to pay commissions, and Grubb & Ellis argued that the case should be sent to arbitration because Bello agreed to it. Bello argued that the arbitration provision was not enforceable because Grubb & Ellis did not agree to it. The court decided that even though Grubb & Ellis did not agree to the arbitration clause, the arbitration provision was still enforceable against Bello because Bello had agreed to binding arbitration. According to this decision, a party who did not agree to an arbitration clause could force the other party, who did agree to the arbitration clause, to go to arbitration because the parties’ remedies did not need to be mutual.

Another case which addressed this issue is Marcus & Millichap v. Hock (1997) 51 Cal. App. 4th 1519. Hock involved a real estate purchase contract. Here, the buyers had initialed the arbitration clause when making the offer to buy the property, but the sellers did not initial the provision. After the purchase was complete, the buyers sued the sellers and the broker. The broker attempted to force the parties into arbitration. However, the Court found that, because the sellers did not agree to the arbitration clause, there was no enforceable arbitration agreement. Therefore, the court held that unless all parties to the contract have agreed to the arbitration clause, the clause is not enforceable. In its decision the Hock court criticized the Bello decision noting that, in order to have an enforceable contract, the parties had to agree to all of the material terms, including the remedies.

The logic in Hock is equally flawed because, if strictly followed, a court could declare an entire contract unenforceable. Such a result would be particularly troublesome in an action litigated years after the close of escrow. To date, no court has followed such an interpretation. However, this area of the law is still unsettled, and we advise that real estate agents and brokers be aware of this issue. Specifically, we advise real estate professionals to obtain an agreement on the arbitration clause at the time the contract is signed so that it is not subject to litigation. Please contact Anthony Ventura for further discussion or questions regarding this issue.

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The information provided here is intended to educate the reader regarding issues of contemporary business interest. It is not intended to constitute legal advice or recommendations for application to any specific legal dispute. You should always confer with your legal counsel about the application of the principals and issues discussed to your own circumstances.