Arbitration Has Its Downsides

Q My standard lease form says that any unresolved disputes with a tenant will be resolved in court. But I've heard that arbitration is cheaper and faster than litigation. Should I revise my lease form to require arbitration instead of litigation?

A No, says litigation attorney Glenn C. Etelson, unless you're in an area where the courts have very long delays or they heavily favor tenants. Arbitration may work well in certain types of disputes, but it often doesn't work well for leasing issues, he says.

One of the many pitfalls of arbitration, says Etelson, is that there's no guarantee you'll get an arbitrator who's familiar with leasing issues. And arbitration generally doesn't let you appeal a decision. This means that a very important issue could be left in the hands of an arbitrator and can't be reviewed by a higher court, he says. Without a right of review—even if the ruling seems inconsistent with the law—you're stuck, Etelson warns.

Arbitration can also be quite costly. For instance, besides paying attorneys, you must also pay a significant amount to the arbitration association and the arbitrator, says Etelson. And filing fees in arbitration can be much higher than court fees, he adds.

Also, when small tenants are involved, arbitration clauses may encourage disputes, Etelson says. Small tenants are more likely to take formal action against you when there's a dispute if they know they can arbitrate—because they assume that arbitration is cheaper and faster than litigation, he warns.

There are only a few leasing situations in which you may want to have a decision made by someone other than a judge—such as determining market rate rent for a lease renewal (where the determination is made by one to three brokers) and resolving construction disputes (by using an architect or engineer), Etelson points out. But don't require arbitration when you've got a monetary default—especially if the tenant doesn't pay its minimum rent, he says. Many areas offer special “summary” proceedings in a court to settle rent disputes—and they can give you fast relief, he explains.

CLLI Source

Glenn C. Etelson, Esq.: Partner, Shulman, Rogers, Gandal, Pordy & Ecker, PA, 11921 Rockville Pike, 3rd Fl., Rockville, MD 20852-2743; (301) 230-5200; getelson@srgpe.com.