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Arbitration of Disputes

When negotiating a lease, parties often spend considerable time planning for contingencies, but very little time planning for the resolution of disputes. In an era when even getting a court trial can take years, and the randomly assigned judge's experience with shopping centers may be limited to prosecuting shoplifters, landlords and tenants should give serious thought to including an arbitration of disputes provision in their leases.

Advantages of arbitration Put simply, arbitration is the voluntary submission of a dispute to an impartial person or persons for a binding or non-binding determination. Its advantages are many. For the parties, the informal setting of a conference room instead of the courtroom may help preservethe business relationship and increases the level of confidentiality. The streamlined procedures, such as limitations on pretrial proceedings and discovery, and the ability to schedule a reliable hearing date, generally save time and money. The overwhelming advantage of arbitration, however, is the ability to select a decision-maker with requisite levels of experience, knowledge and skill.

Appropriate issues for arbitration Choosing what issues to arbitrate is the first step. Boilerplate language that casts a net over "any controversy or claim arising out of or relating to this agreement" is not appropriate in the leasing context. For example, evictions are not good candidates for arbitration since most states provide summary (i.e., speedy) judicial procedures, and, in any event, the purpose of an unlawful detainer action is to regain possession, not to resolve disputes. On the other hand, disputes over the calculation of fair market rent, CAM and other charges, questions of compliance, enforcement and interpretation, and virtually any issue involving a determination as to what is reasonable, such as in alteration and assignment provisions, invite third-party review. Construction and maintenance disputes can also be suitable candidates for arbitration.

An arbitration provision should state the applicable procedural rules to be followed, be they state law or those of a private dispute resolution organization such as the American Arbitration Association (AAA) or JAMS/Endispute. There are different sets of rules available for different categories of dispute resolution; make sure the rules selected are appropriate for the issue or issues identified for possible arbitration. For example, if maintenance disputes are to be arbitrated, check to see if the governing rules allow for interim measures such as injunctive relief. If not, consider directly authorizing such action in the arbitration provision.

Selecting qualified arbitrators Once appropriate issues and rules are identified, consider the desired background of the person you want to decide certain categories of issues. A retired judge or senior real estate partner in a law firm may be fine for deciding questions of real estate or contract law, but issues involving audits, fair market rental values or leaky roofs may be more suitable for review by accountants, brokers, contractors and engineers. If speed and cost-effectiveness are motivating factors for choosing arbitration over litigation, then by all means specify that one arbitrator, rather than a panel of three, be mutually selected by the parties or assigned by the administrating organization.

Other considerations Since time is of the essence, provide a timetable for starting the arbitration, selecting the arbitrator or arbitrators, exchanging documents and having the decision rendered. Agree on a venue for the hearing in advance, especially if one or both parties maintain offices at a considerable distance from the shopping center location. Give thought to providing for or modifying pre-hearing discovery rules, depending on how much information you believe your side will have or need. Some administrative rules and state laws automatically provide for limited discovery, but others do not unless specifically agreed to in the lease.

Unless the parties simply want an advisory decision or want the right to appellate review, there should be language to the effect that the arbitrator's decision is final, binding, and non-appealable and that judgment on the award may be entered by any court with jurisdiction. If there is a guarantor of the lease, make sure that the guarantor is also bound by the arbitration provision.

The costs of the arbitration should be addressed. Because arbitrators usually require fees up front, make sure that each side is required to advance its share of the costs until a final decision is rendered.

Finally, verify that the arbitration provision complies with any legal notice requirements such as bold type in a certain size and a space for the parties to initial in agreement to arbitrate.

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