Mediating the Commercial Lease Dispute

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This article has been modified from its original publishing. The original article first appeared in the ACREL Papers Fall 2007 publication.

Mediation has been successful in commercial real
estate disputes for several reasons. Due
to the nature of the real estate market, land or rental space may not have the
same value at the end of litigation as it did when the dispute arose. The value of the parties’ interest may be
damaged by injunctions, restraining orders or other restrictions imposed by the
courts. Depending on the characteristics
of the deal, the nature of the real estate and the uses of the property, a
variety of disputes can arise from a commercial property lease transaction.

The common sources of commercial property lease
disputes are those issues often contested in commercial real estate
transactions and the differing interpretations of lease provisions by the
landlord or tenant. These generally
include:

• rent
  calculations or review,
• annual
  allocation of property tax and common area expenses,
• enforcement
  of operating covenants,
• assignment
  and subletting restrictions,
• landlord
  consent (usually required not to be withheld unreasonably in relation to
  assignment or subleasing or quality of proposed tenant alterations),
• improvements,
  changes or alterations to the premises,
• expansion
  or reduction of leased premises,
• relocation
  rights,
• options
  to purchase or rights of first refusal and first opportunity,
• adequacy
  of maintenance,
• responsibility
  for repairs,
• exclusive
  use rights or prohibited uses, and
• permissible
  commercial activities or use restrictions (such a claim may involve a
  third party who is also a tenant).[1]

Outside of the lease disputes noted above, problems
can emerge in other areas, including eviction rights and procedures,
identifying the premises, establishing commencement and expiration dates and clarifying
conditions surrounding the delivery of commercial space.[2]

Benefits of
Mediation in the Commercial Lease Dispute

Mediation advances
interests rather than decides rights, and requires willingness to compromise by
the parties. A mediator’s assistance in
a particular dispute may be the catalyst to bring the parties to reconsider the
lease in light of their experience with it. In addition, resolving lease
disputes efficiently is often vital to third parties including lenders,
appraisers, REITs, and other investors.[3]

1. Less
Time and Expense than Litigation

Judge Learned Hand said many years ago, “As a
litigant, I should dread a lawsuit above all else, other than sickness and
death.”[4] Mediation has the potential to save the
parties time and money, especially considering commercial real estate
mediations can often be completed in a single day at a fraction of the cost of
litigation.

The
actual cost of mediation depends on the mediator selected. In a typical real
estate mediation, a commercial mediator charges from $150 to $500 per hour, similar
to the hourly rates charged by attorneys. A real estate mediation usually lasts
three to four hours, but, depending on the complexity of the issues, may well
take up to a full day (six or eight hours).
Generally, the cost for the mediation and the manner in which cost is
apportioned among the parties is set out in the Mediation Agreement. Although mediation is not inexpensive, when
litigation can cost each party $25,000 to $75,000 or even more, mediation is
well worth considering.[5]

2. Creative
Solutions of Complex Issues

Commercial property transactions often involve
complex documents with detailed covenants, restrictions, and controls specific
to the real estate industry. While judges are capable generalists who can learn
about a case in a short period of time, there are significant advantages to
having disputes resolved by a neutral mediator with specific knowledge of the
issues involved and experience negotiating commercial real estate transactions. In evaluating disputes regarding a commercial
property lease, “the mediator should consider what is important to a commercial
tenant, property owner, property manager, or landlord concerning the cost of
acquiring or leasing the space and can identify issues regarding a proposed use
or occupancy.”[6]

Using a mediator who is
also an experienced real estate professional offers the potential for the
parties to reach a creative solution, not contemplated by the contract or lease,
benefiting all parties. The solution may simply start with the dispute and look
to the relationship more generally. It
may consider a variety of options, such as: lengthening or shortening the term
of the lease, changing the location or amount of space leased, reconfiguring
space, establishing a formula to avoid disputes in future rent reviews,
assignment of the lease or subleasing, tenant inducements, or tenant
improvements.[7] Such creative solutions are generally not
possible or available in the litigation process.[8]

3. Parties
Control the Resolution

Mediation is a favored dispute resolution technique
because the parties control the outcome.
The parties are active participants in the process and are responsible
for the agreed upon resolution. When the
parties are instrumental in creating the resolution, they are generally more
apt to abide by it.

4. Confidentiality

Another benefit of mediation is the proceedings are
confidential and the outcome is generally not considered public
information. Real estate professionals, developers,
contractors, and inspectors place a substantial value on both their time and
their reputation.[9] Their future income and success are directly
related to both and it is generally not in their best interest to wage a
lengthy public litigation if it can be resolved quickly and confidentially.

Confidentiality is also essential to open
communication amongst the parties and with the mediator. The fact parties are
pursuing mediation usually reflects a level of trust and recognition the
adversary is a responsible party who will act fairly and in good faith during
the mediation.[10] Parties who might not be comfortable speaking
at trail regarding sensitive issues are more inclined to speak during a
confidential mediation.[11] Also, the confidential nature of the process
gives parties who might not be allowed to speak freely at trial the opportunity
to relate their version of the dispute in their own words.[12]

5. Client
Education

Mediation
also offers the party an invaluable opportunity to understand the strengths and
weaknesses of their case.[13] It forces the party to hear and consider the
analysis and perspective of an objective third-party. This may force the party to acknowledge
hidden weaknesses and be more realistic regarding a possible resolution.[14]

6. Greater
Adherence to Final Resolution

Mediation
gives the parties the opportunity to control the final resolution of their
dispute. Rather than having an outsider, such as a judge, jury or arbitrator,
resolve their dispute for them, the parties do it themselves.[15] Gains
and losses incurred pursuant to a mediated agreement are more predictable for
the parties and the likelihood of satisfaction with the outcome is greatly
increased. Mediated agreements tend to hold up over time because the resolution
was not imposed upon the parties, but rather crafted by the parties and,
therefore, the parties are generally more satisfied with the outcome.[16]

7. Preservation
of Relationship

Many commercial real estate experts cite the
preservation of business relationships as a major advantage to resolving
disputes through mediation rather than lawsuits. Compared to litigation, the
nature of mediation is less confrontational, less likely to trigger issues of
pride and ego, and more conducive to enabling the parties to work together.[17]

Mediation Clauses

In recent years there has been a growing interest in
the use of mediation as a means of resolving real estate disputes rather than using
the traditional litigation process. For buyers, sellers, and real estate
brokers and agents, including dispute resolution clauses in purchase, sale, or
broker contracts removes a dispute from the high-cost litigation system to a
more efficient, cost-effective mediation or arbitration process.[18] Typically, the lease will establish either a
general right to mediate disputes or will specify mediation for specific issues
on which the landlord and tenant have been unable to agree. Although a clause requiring mediation is now
found in almost every purchase agreement, many real estate professionals and
most clients have little knowledge and experience with mediation.

Conclusion

“A renewed
emphasis on creative, privately developed approaches where people take ownership
for resolving disputes may provide courts more time and resources to focus on
those matters that genuinely require public trial.”[19] Mediation is a voluntary process which
requires the parties to focus on resolving their current dispute and preserving
their future relationships. The parties must
be willing to focus on their present and future needs, and not dwell on who may
have been right or wrong. The parties
must be open to new options and willing to compromise. Commercial lease dispute are more readily
resolved by mediation. For that reason,
practitioners should include lease provisions requiring mandatory mediation as
a condition prior to seeking judicial resolution.

End Notes