Thursday, April 24, 2008
Mediating the Commercial Lease Dispute
by Jerry Slusky
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,
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).
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.
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.
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.” 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.
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.”
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. Such creative solutions are generally not possible or available in the litigation process.
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.
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. 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. Parties who might not be comfortable speaking at trail regarding sensitive issues are more inclined to speak during a confidential mediation. 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.
5. Client Education
Mediation also offers the party an invaluable opportunity to understand the strengths and weaknesses of their case. 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.
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. 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.
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.
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. 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.
“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.” 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.
 Brian J. Wallace, Resolving Commercial Lease Disputes, at http://www.lawsonlundell.com/resources/
ResolvingCommercialLeaseDisputes.pdf, 2004 (last visited July 23, 2007).
 National Arbitration Forum, Resolving Disputes in Commercial Property Sales and Leasing, 3 (October, 2005).
 National Arbitration Forum, Resolving Disputes in Commercial Property Sales and Leasing, 4.
 Judge Learned Hand, The Deficiencies of Trials to Reach the Heart of the Matter, 3 LECTURES ON LEGAL TOPICS 87, 105 (1926).
 Alan R. Seher, Esq., Mediating Real Estate Disputes, at http://www.wwlaw.com/mediate.htm (last visited July 23, 2007)
 National Arbitration Forum, Mediating and Arbitrating Commercial Financial Disputes, at http://www.adrforum.com/users/naf/resources/CommercialFinanceWP.pdf, 13-14, December 2005,
 57 AM JUR Trials 555.
 Seher, supra.
 Ranking, supra.
 57 AM JUR Trials 555.
 Seher, supra.
 Wallace, supra.
 National Arbitration Forum, Resolving Disputes in Commercial Property Sales and Leasing, 9.
 Pearlstein, at 654 (citing Arthur Pearlstein, The Justice Bazaar: Dispute Resolution through Emergent Private Ordering as a Superior Alternative to Authoritarian Court Bureaucracy, 22 Ohio St. J. on Disp. Resol. 739, 740 (2007)).
Jerry Slusky is the founder and chairman of Slusky Mediation LLC. Jerry serves local and regional clients in real estate and related matters. Jerry is known for his expertise in real estate planning, zoning, development, financing and leasing. In addition to legal training and experiences, Jerry is trained mediator who has studied with the Nebraska Office of Dispute Resolution. Jerry undertook an intensive mediation training workshop offered by the internationally recognized leader in the field of mediation, ADR Chambers. He has eighty hours of Alternative Dispute Resolution (ADR) training conducted in affiliation with Notre Dame University and the University of Windsor in Toronto. Jerry is also a member of the Association for Conflict Resolution (ACR).
Additional articles by Jerry Slusky