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Lange v. Schilling – Refusal to Mediate Before Litigation Sacrifices Right to Attorney’s Fees in CAR Contracts

Lange v. Schilling (2008) 163 Cal.App.4th 1412 – Refusal to Mediate Before Litigation Sacrifices Right to Attorney’s Fees Under California Association of Realtors (CAR) Form Lease and Purchase and Sale Agreement

Buyers, sellers, tenants and landlords should beware of filing a lawsuit before attempting to mediate under the CAR form purchase and sale and lease agreements. Racing to the courthouse may mean that the plaintiff cannot be awarded attorney’s fees if they prevail. This may be a costly mistake for the party and their attorneys, and may be a mistake that cannot be undone.

This is because Lange v. Schilling (2008) 163 Cal.App.4th 1412 found that attorney’s fees cannot be awarded when a plaintiff files suit before attempting mediation under the terms of a standard California purchase and sale agreement containing the same language found in the California Association Realtors forms at issue in many cases filed in California.

Lange found that a “Plaintiff had a clear and simple way to retain the right to attorney fees. All he had to do was attempt to mediate with sellers before he filed suit. Instead, he filed first and offered mediation later. Paragraph 17A bars recovery of any attorney fees by a prevailing party who does not first attempt mediation. This provision ‘means what it says and will be enforced.’ The [attorney] fee award must be reversed.”

In Lange, the “Defendants challenge[d] the court’s award of attorney fees” on the basis that “the clear language of the agreement precludes an award of attorney fees if a party does not attempt mediation before commencing litigation. Because plaintiff filed his lawsuit before offering mediation, they argue, there was no basis to award fees and the court’s order must be reversed. We agree.”

The court in Lange noted that: “While paragraph 22 of the agreement authorizes attorney fees to the prevailing party in a dispute between a buyer and seller, that right is contingent on compliance with paragraph 17A. Again, this provision states: ‘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.’ Plaintiff filed his complaint first and only later offered mediation. His failure to meet the condition precedent required by paragraph 17A precludes any award of fees.”

Lange also found that “[t]he doctrine of substantial compliance is not applicable in this situation. Paragraph 17A sets forth a clear and unambiguous condition precedent that must be met in order for attorney fees to be awarded: the party must attempt mediation before commencing litigation. By filing his complaint before attempting mediation, plaintiff lost any right to attorney fees. Paragraph 17A is designed to encourage mediation at the earliest possible time. This provision would become meaningless if a party were allowed to recover attorney fees by making a request for mediation after litigation has begun and then claiming substantial compliance.”

In conclusion, Lange found that “Plaintiff had a clear and simple way to retain the right to attorney fees. All he had to do was attempt to mediate with sellers before he filed suit. Instead, he filed first and offered mediation later. Paragraph 17A bars recovery of any attorney fees by a prevailing party who does not first attempt mediation. This provision ‘means what it says and will be enforced.’ The fee award must be reversed.” Id. (quoting Frei v. Davey (2004) 124 Cal.App.4th 1506, 1517).

Lange cited a case reaching the same conclusion where it was found that: “It was Johnson, however, who filed an action without first attempting to resolve the matter through mediation. By filing the action, Johnson forfeited his right to recover attorney fees.” Johnson v. Siegel (2000) 84 Cal.App.4th 1087, 1101.

So far, only one published case has cited Lange, doing so with approval in finding that: “The parties’ standard form purchase agreement provides for the prevailing party in any dispute to recover legal fees. However, this right is subject to a condition precedent,” quoting Lange. Cullen v. Corwin (2012) 206 Cal.App.4th 1074, 1077. In Cullen, plaintiff sought to overturn the trial court’s award of defendant’s attorney’s fees. Plaintiffs argued that defendants should be barred from an attorney’s fees award because defendants failed to agree to mediation, which was a condition precedent under the purchase agreement for recovery of legal fees. Nevertheless, the trial court awarded defendants attorney’s fees. In the plaintiffs’ appeal, the award of attorney’s fees was reversed for failure to mediate, finding that: “The Corwins consequently are not entitled to recover their legal fees.”

Lange also noted the inefficiency of the courts when compared to mediation, finding that the “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 if, prior to judicial proceedings, a disinterested mediator had explained to the parties the costs of litigating the dispute through to a judgment or a final resolution by an appellate court.”

Lange cited Leamon v. Krajkiewcz (2003) 107 Cal.App.4th 424, 433, which found that “the public policy of promoting mediation as a preferable alternative to judicial proceedings is served by requiring the party commencing litigation to seek mediation as a condition precedent to the recovery of attorney fees. In this case, had the parties resorted to mediation, their dispute may have been resolved in a much less expensive and time-consuming manner. Instead, in a dispute that entered the court system as a small claims action for $5,000 in damages for breach of contract, Leamon spent over $27,000 in attorney fees and, as a result of her victory, avoided an order for specific performance that would have required her to accept $82,000 in exchange for the Property. The economic inefficiency of this result may have been avoided if, prior to judicial proceedings, a disinterested mediator had explained to Leamon and the Krajkiewczes the costs of litigating the dispute through to a judgment or a final resolution by an appellate court.”

Indeed, the California Association of Realtors Residential Lease After Sale provides in Paragraph 37 that: “In any action or proceeding arising out of this Agreement, the prevailing Landlord and Tenant shall be entitled to reasonable attorney fees and costs from the non-prevailing Landlord or Tenant, except as provided in paragraph 36A agreed by the parties.”

In turn, Paragraph 36A of many CAR lease agreements provide that “Landlord and Tenant agree to mediate any dispute or claim arising between them out of this Agreement, or any resulting transaction, before resorting to court action. Mediation fees, if any, shall be divided equally among the parties involved. 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.

Even further, the California Association of Realtors purchase and sale agreement often provides in Paragraph 25 that: “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 22A.”

In turn, Paragraph 22 of the purchase and sale agreement (PSA) provides that: “The Parties 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 through the C.A.R. Real Estate Mediation Center for Consumers (consumermediation.org) or through any other mediation provider or service mutually agreed to by the Parties….If, for any dispute or claim to which this paragraph applies, any Party (i) commences an action without first attempting to resolve the matter through mediation or (ii) before commencement of an action, refuses to mediate after a request has been made, then that Party shall not be entitled to recover attorney’s fees, even if they would otherwise be available to that Party in any such action.”

In California, buyers, sellers, landlords, tenants, their agents and their attorneys should pay very close attention to the terms of the contract to make sure they do not cause a costly error for their clients. Before filing suit, contact an experienced real estate attorney in California to discuss your best strategy to make sure the defendant does not take advantage of your mistake.