This article was posted on Sunday, Jul 01, 2018

Hello everybody.  I am sorry to report that on April 30, 2018, the California Court of Appeal issued a really bad ruling regarding arbitration insofar as it will affect landlords.  The decision provides a strong basis by which a claimant, including a residential tenant, can avoid enforcement of a binding arbitration provision in a lease or other contract thereby forcing a dispute to be tried in court rather than by an arbitrator.

One aspect of this new case, entitled Weiler v. Marcus & Millichap Real Estate Investment Services, is that it potentially allows tenants to compel their landlords to defend in court (such as in a jury trial), claims the tenants file against them, rather than have the issues arbitrated, which landlords would generally prefer.

But first, some background.

Nature of Arbitration Proceedings

Arbitration is an alternative to litigation as a procedure by which two parties, such as a landlord and tenant, submit their disputes to a neutral arbitrator for a decision which is final, binding and non-appealable.  The arbitrator is generally a retired judge or a seasoned attorney who has practiced for many years in the field of law involved.

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Some of the benefits of arbitration for landlords are that (1) most proceedings are concluded much more rapidly than litigation, (2) discovery is often limited (i.e., less depositions and interrogatories), (3) the amount of punitive damages (if they are awarded at all) is likely to be well less than what a jury would award in court because juries are often more influenced by passion than are arbitrators, (4) the arbitration proceedings are generally kept confidential, and (5) the parties have control over the selection of an arbitrator but almost no control over the selection of a judge and limited control over the selection of a jury.

There is one main exception to a landlord generally favoring arbitration proceedings.  In connection with evictions, a cause of action for unlawful detainer should never be arbitrated.  Instead, it should always be filed by the landlord in court.  The reason is that judicial actions for unlawful detainers are resolved much more quickly in litigation than in arbitration.

For example, statutory law requires that an unlawful detainer action be brought to trial within 20 days following the date that the landlord requests the court to set the time for trial.  (C.C.P. Section 1170.5)  In arbitration, there is no such rule.  So it may take many months for the eviction proceeding to be ruled on by an arbitrator, and even longer for the arbitration award of eviction to be approved by a judge (which is necessary), who would then issue a court judgment for unlawful detainer.

Most other types of disputes (except those in Small Claims Court) between landlords and tenants will take 1 to 1½ years to come to trial in California, whereas those same disputes in arbitration proceedings may be decided in as little as 3 or 4 months, depending on the arbitrator’s schedule.

Arbitration is Usually Preferable for Residential Landlords

In the majority of disputes between landlords and residential tenants, the tenant will be “judgment proof” if the landlord obtains an award of any significant amount of money.  That is because residential tenants often have little or no monetary savings or other valuable assets.

On the other hand, if the tenant prevails on claims he asserts against his landlord, the landlord is almost always financially solvent, or at least has insurance to pay the tenant’s award.

Also, because a jury is likely to award greater damages against a landlord than would an arbitrator (some lawyers might disagree with that statement, but it is definitely my strong opinion), a landlord’s pocketbook would be better served by having the case decided in arbitration.

Considering that a landlord’s claim against a residential tenant is usually not collectible because the tenant will not have the financial wherewithal to pay, a landlord almost never wants to file a non-eviction lawsuit or arbitration proceeding against such a tenant.

On the other hand, if the tenant has a meritorious claim against a landlord, the tenant would be best served by filing a judicial action against the landlord.  If the tenant wins, he may likely receive a larger (and collectible) award from a jury than from an arbitrator.

For those reasons, most of my clients who engage me to draft their leases want a mandatory arbitration provision to be included.  The provision I draft consists of 25 or so single spaced lines.  While that may sound like overkill, it is not.  It is important to ensure, to the maximum extent that I can for a client, that the arbitration provision will be enforceable.  Significantly, I have never heard of a residential tenant refusing to sign a lease for an apartment unit merely because an arbitration provision is included. Arbitration can only be compelled if the rental agreement so provides.

As a general rule with limited exceptions, neither a landlord nor a tenant can be compelled to have their issues heard before an arbitration tribunal if the rental agreement or lease between the two does not provide for mandatory arbitration.  (See: Hotels v. L.A. Pacific Center decided by the California Court of Appeal on May 17, 2018.)

While the parties can always stipulate to have the matters arbitrated even in the absence of a contractual provision, if either party will not agree, then the issues are resolved by litigation.

The Court of Appeal’s Disappointing New Law

Because arbitrations come to a “trial” faster than lawsuits, arbitration proceedings are typically less expensive than court trials insofar as attorney’s fees for each party are concerned.  On the other hand, the overall cost to the litigants might be more with arbitration taking into account that retired judges and seasoned attorneys, who act as arbitrators, bill for the time they spend on the case, often at $600.00 to $850.00 per hour.  Those fees are generally split equally between the parties and paid in advance as the arbitration proceeds.

A courtroom judge, on the other hand, does not charge the litigants for his or her time.

What that means as a practical matter is that the landlord will be likely able to afford the arbitrator’s fees whereas the residential tenant will not.  Thus, the high cost for an arbitrator may induce the tenant to discount and settle his claim against his landlord in order for the tenant to avoid paying the arbitrator’s mounting fees as the arbitration proceeds.

Unfortunately, in the April 30, 2018 Weiler case, the California Court of Appeal largely pulled the rug out from a landlord compelling residential tenants to participate in arbitration proceedings.  It held, implicitly, that even if a lease requires a party to have his claims resolved in arbitration, if the party’s financial circumstances are such that he lacks the means to pay his share of the cost of arbitration, a court may reject the arbitration provision on the request of the impecunious party (e.g., the penniless residential tenant) and compel the affluent party (i.e., the landlord) to litigate in court where the judges are free.

The court’s rationale is that all parties are entitled to have a forum by which they can present their claims and have them resolved.  If an impoverished, residential tenant cannot afford the arbitration fees (which typically they cannot), then the court will not want to deprive the tenant of being able to seek redress in litigation.  The appellate court explained: “Though the law has great respect for the enforcement of  valid arbitration provisions, in some situations those interests must cede to an even greater, unwavering interest on which our country was founded – justice for all.  A party’s fundamental right to a forum she or he can afford may outweigh another party’s contractual right to arbitrate.”

The court also explained that if the party, in fact, lacks the financial means to pay his share of the cost of arbitration, forcing the matter to remain in an arbitration forum would effectively result in the party being deprived of any forum to resolve his claims against the defendant.

The court concluded by ruling that if one party (e.g., a residential tenant) legitimately lacks the financial wherewithal to pay for his half of the arbitrator’s fee, then a trial court has to the power to (1) order that the arbitration continue only so long as the other party (e.g., the affluent landlord) agrees to pay both halves of the arbitrator’s fees, or alternatively (2) order that the arbitration be terminated and the matter be transferred to the Superior Court for adjudication.

The Facts of the New Case

The Weiler case arose in the context of an unhappy buyer who sued her broker for breach of fiduciary duty, negligence and misrepresentation in connection with a broker’s alleged false statements that the purchase of certain Texas property which had a Red Robin restaurant was a “wonderful investment” and that the restaurant was busy and doing well financially.  The buyer alleged that she purchased the property for $2 million more than the fair market value based on the brokers’ misrepresentations.  The brokers denied all of the buyer’s contentions.

The contract between the buyer and the broker required that the disputes be resolved in accordance with the arbitration rules of the American Arbitration Association.  The application of those rules provided that the issues would be resolved by 3 arbitrators, rather than a single arbitrator.  The arbitrators’ collective hourly rate was $1,450.00.  During the pendency of the arbitration, the buyer became unable to pay the arbitration fees.  The buyer then petitioned the court to have the matter transferred to the judicial system.

The Court of Appeal held that if the buyer was in fact impoverished, it would be unfair to further enforce the arbitration provision unless Marcus & Millichap paid the buyer’s portion.

Significance to AOA Members

The significance of the new Weiler decision to AOA members is that this case may make it all the more difficult for a landlord to compel a tenant to arbitrate a dispute unless the landlord is willing to ante up the tenant’s half share of the arbitrator’s fees and costs.

Thus, it is probable that residential tenants who have knowledgeable counsel and who hereafter want to avoid arbitration in favor of litigation, will claim that their financial condition prevents them being able to afford the cost of the arbitration.

Still, it is prudent for landlords to include an arbitration provision in their residential leases even given the fact that it might ultimately be held to be unenforceable if the tenant is insolvent.  All things considered, having disputes submitted to binding arbitration is likely to favor landlords as compared to residential tenants.

With leases of commercial or other non-residential premises, whether or not a lessor wants to include an arbitration provision in the rental agreement needs to be evaluated on a case by case basis.

BREAKING NEWS:  Just as this article was going to press, the United States Supreme Court issued a very favorable ruling in the context of employers versus employees.  It held that an employee can waive the right to bring a class action lawsuit if that waiver is properly drafted into the employment contract.  In the context of hiring an apartment resident manager, the ruling supports the right of the employer, be it the building owner or the management company, to include a provision in the Resident Manager Agreement that compels the manager to bring any wage and hour claim in binding arbitration and waive the right of the manager to file a class action lawsuit.

Dale Alberstone is a prominent litigation and transactional real estate attorney who has specialized in real property law for the past 40+ years.  He has been appointed to periodically serve as a judge pro tem of the Los Angeles Superior Court and is a former arbitrator for the American Arbitration Association.  He also testifies as an expert witness for and against other attorneys who have been accused of legal malpractice.

Mr. Alberstone has been awarded an AV rating from Martindale-Hubbell.  An AV rating reflects an attorney who has reached the heights of professional excellence and is recognized for the highest levels of skill and integrity.       

The foregoing article was authored on June 1, 2018.  It is intended as a general overview of California law and may not apply to the reader’s particular case.  Readers are cautioned to consult an advisor of their own selection with respect to any particular situation.

Questions of a general nature are warmly invited.  Address correspondence to Dale S. Alberstone, Esq., ALBERSTONE & ALBERSTONE, 269 S. Beverly Drive, Suite 1670, Beverly Hills, California 90212.  Phone:  (310) 277-7300.