People who find themselves involved in real estate contracts would do well to pay attention to a recent ruling by California's Second District Court of Appeal (Van Slyke v. Gibson). For one thing, it reminds us that all that wording in the contracts actually means what it says, and the courts will uphold it. Secondly, the ruling points out an important aspect of the mediation provision found in contracts produced by the California Association of Realtors® (CAR).

The facts of the case were relatively straightforward. In May of 2004, Mike Van Slyke made a written offer to purchase some undeveloped Santa Maria land owned by the Gibsons. The Gibsons made a counter offer which included the statement, "Upon acceptance, buyer to provide prequalification letter from lender, as well as written confirmation from lender that they will loan on acreage with existing modular home." Van Slyke accepted the counter offer, but never did provide the information from the lender.

The Gibsons then moved on and sold the property to another party, the Daniels. Shortly thereafter, Van Slyke brought an action for breach of contract and specific performance against the Gibsons. A lis pendens was filed by Van Slyke; the Daniels then also filed a lis pendens and a specific performance suit; and the Gibsons cross complained against Van Slyke. Paperwork grew exponentially.

Ultimately, the Gibsons dropped their cross-complaint, and the trial court consolidated the various actions, finding against Van Slyke and in favor of the Daniels. As the dust was settling, the Gibsons sought attorney fees from Van Slyke for the cost of defending against the specific performance action he had brought. This request was made pursuant to the CAR purchase agreement which provides that, in any action arising out of the agreement, the prevailing party shall be awarded reasonable attorney fees. The trial court agreed, and awarded fees to the Gibsons.

Van Slyke objected and appealed the award, relying on a contractual exception to the attorney fee provision. The exception, contained in Paragraph 17 of the current CAR Residential Purchase Agreement, provides that, even if a party prevails, they shall not be awarded attorney fees unless, prior to commencing the action, they failed to seek mediation, or they had refused to mediate.

The appellate court noted that there was some dispute as to whether the Gibsons had sought mediation prior to filing their cross complaint, but that it didn't matter here. The Gibsons had dropped their cross complaint, and the attorney fees they sought had nothing to do with that. Rather, they were seeking attorney fees for the costs of defending against Van Slyke's specific performance suit.

The court noted that the burden of seeking mediation is on the party who commences the suit. Quoting from an earlier case (Johnson v. Siegel), "Seeking mediation is a condition precedent to the recovery of attorney fees by the party who initiates the action." When Van Slyke initiated the action against the Gibsons, it was not the Gibsons' responsibility to then seek mediation. That is something Van Slyke should have done prior to filing suit. Van Slyke's failure to do so would have precluded him from being awarded attorney fees, even if he had won. But the Gibsons were not required to seek mediation prior to mounting their defense.

The Gibsons attorney fees, by the way, were $94,974. We are not just talking about arcane principles. That's real money. There are lessons here for those in real estate transactions who so easily say, "I'll sue." (1) It can turn out to be really expensive; and (2) pay attention to the mediation provision.