Should You Arbitrate or Mediate a Commercial Lease Dispute?

Arbitration and mediation are alternative dispute resolution techniques that can keep parties out of court and out of the public eye. Many landlords include a mandatory arbitration or mediation clause, or both, in their lease contracts.

Just what are these provisions? And do you actually have to arbitrate or mediate your dispute if you agreed to in your lease? Below, our California commercial real estate attorney answers your questions.

What are Arbitration and Mediation?

Arbitration is a little like a trial, except it is private. Each side presents evidence to an arbitrator or panel of arbitrators, who are usually former judges but could also be attorneys. Arbitrators pledge to be neutral, like a judge would. After hearing evidence, the arbitration panel decides which side wins the dispute. An arbitration award can be binding, since you agreed to be bound by it.

Mediation is different. The focus is on settling the dispute by reaching an agreement. A third-party neutral acts as the mediator and listens to each side describe the dispute. Mediators have training in helping people find common ground and can help propose a solution. Mediation is not binding, because the mediator does not act like a judge. But if both sides reach an agreement, they can sign an agreement and submit it to the court, in which case it becomes a binding agreement.

Why Do Landlords Prefer Alternative Dispute Resolution (ADR)?

There are many reasons. One is cost. Litigation can be very expensive, and arbitration or mediation can often cut down on expenses. Of course, litigation and arbitration are not free. Each side typically pitches in to cover the cost of either the arbitrator or the mediator, who typically charge by the hour. However, certain discovery techniques are sometimes streamlined, which saves on money.

Alternative dispute resolution is also private, and large landlords might be worried about their reputation in the business community. One false accusation can ruin a carefully maintained reputation, so many companies have an incentive to stay out of court.

Mediation or arbitration can also be faster, which again helps save money. The value of real estate can also fluctuate dramatically from the start of a lawsuit to its completion, so settling cases quickly is often in everyone’s best interest.

Are These Clauses Binding?

They can be. Any alternative dispute provision must be drafted with sufficient clarity so that each side understands they are giving up the right to go into court. Usually, attorney should look at a lease before it is signed.

If you signed an agreement to arbitrate and then file a lawsuit, the other side can seek an order to force the case to arbitration and the judge may stay the case until arbitration is complete.

Using an alternative dispute resolution clause makes particular sense with commercial leases because both sides are businesses. A court might be worried that an elderly grandmother doesn’t know what rights she is signing away when she signs a lease. However, businesses should have enough sophistication.

What Issues Can Be Resolved this Way?

Almost any dispute that arises under a lease, including:

• Rent calculation
• Property tax allocations
• Covenant enforcement
• Restrictions on subletting or assignment
• Improvements or alterations, including who pays
• Adequacy of property maintenance
• Common area maintenance fees

Contact a California Commercial Real Estate Attorney for Assistance

At Wagner Zemming Christensen LLP, our team has tackled many commercial lease disputes inside and outside court, and we know how to use ADR to our client’s advantage. We guard our client’s privacy and help their businesses retain value. For help with your case, contact us to schedule your free consultation.