Trouble with a Tenant? Consider Mediation Before You Arbitrate
As the owner of a commercial property, the leases you enter into probably require you to settle your differences with tenants out of court, using what are known as “alternative dispute resolution” methods. Traditionally, these contracts have required you to resolve your disputes using a certified arbitrator. These days, however, commercial parties more often are entering into contracts that require them to first turn to mediation—arbitration's less formal cousin.
“There has been a recent push in favor of clauses that require parties to mediate a dispute before they hire an arbitrator,” says Navndu Joshi, an attorney with Camarillo, Calif.-based Lingl & Joshi, PLC. Why the shift? Mediation allows the disputing parties to come up with a mutually satisfactory solution, because a neutral third party facilitates the dialogue. “There is no winner and loser,” Joshi says.
That can be a real benefit to parties—such as owners and tenants—whose relationship may continue after their differences are resolved. Arbitration doesn't give the parties to a contractual dispute that freedom.
“In arbitration, both parties place the facts of their position before the arbitrator, who necessarily chooses one position over the other,” says Joshi. “It does not provide for middle ground or alternative solutions,” he adds.
How Mediation Works
Joshi uses a hypothetical example to illustrate the difference between the alternative dispute resolution methods. If a tenant has complaints about the building's housekeeping services and the parties resolve the dispute using a mediator, creative solutions are available to them. For example, the tenant may agree to contract for housekeeping on its own, and the owner may agree to reduce the rent accordingly.
“Such a solution would not be viable in an arbitration setting,” Joshi says. “The arbitrator would decide whether or not the building's housekeeping services are acceptable and render a decision that would be unfavorable to one of the sides.”
John Horn, director of FORUM Dispute Management, a provider of alternative dispute resolution services, experienced the benefits of the flexibility of mediation firsthand when he moved out of a building before his lease had run out.
“We negotiated, and I found out that what the owner really wanted was just for me to get out as soon as possible,” says Horn. He further reports that he and the owner reached an agreement that, among other things, didn't require him to pay the full amount of rent for the remainder of the lease. The agreement also provided that if Horn found another tenant, he could recover some of the rent he would be obligated to pay.
In addition to allowing owners and tenants to reach more creative resolutions, mediation is often less expensive than arbitration. According to Horn, mediation generally doesn't take more than a day, and requires no evidence and objections formalities. “With arbitration, the potential range of costs is greater,” he says. Mediation can help an owner and a tenant cut down on costs when it's used as a precursor to arbitration, too.
“If an owner and a tenant are unable to resolve all issues, mediation may help them at least to narrow the list of disputes they need an arbitrator or judge to decide,” says Joshi.
When Not to Use Mediation
Mediation isn't always the optimal way for owners and tenants to resolve their disputes. When an owner and a tenant are certain they disagree on a single, clear-cut issue—such as whether the owner has grounds to force the tenant to vacate the premises—arbitration may be the best place to start, Horn says. In such a situation, mediation—most useful for helping parties identify the crux of their feud—really isn't necessary.
Also, if the parties involved in mediation don't reach a mutually acceptable resolution, the conflict will remain unsettled. Arbitrators, on the other hand, necessarily render a decision. Whether that decision is appealable depends on the rules of the organization that conducts the arbitration.
Still, in Horn's opinion, when it comes to disputes between owners and tenants, mediation has very few downsides. It doesn't limit the parties' post-mediation procedural options in any way; if an owner and a tenant don't resolve their differences after having used a mediator, they are free to arbitrate or take their disagreement to court.
Add Mediation Clause to Lease
If you want to mediate your disputes with tenants before you resort to more formal—and often more expensive—dispute resolution methods, Joshi suggests including the following in your leases:
MODEL LEASE LANGUAGE
Mediation. Except for the nonpayment of rent as specified in this Agreement, Landlord and Tenant agree to mediate any dispute or claim arising between them under this Agreement prior to arbitration or any court action. Mediation fees, if any, shall be split equally between the parties.
Joshi explains why he excludes nonpayment of rent disputes from the Model Lease Language: “If a tenant stops paying rent, almost all jurisdictions around the country have specific means of ejecting or removing the tenant,” Joshi explains, referring to the first clause of the Model Lease Language. “The danger in mandating mediation is that it could potentially delay the right to eject the nonpaying tenant.”
Joshi further suggests that owners have their attorney tailor mediation clauses to meet the owner's needs. “For example, an owner could add the method of notice to be given regarding the mediation,” he says. “In addition, a provision could be added stating that if a party should commence arbitration or court action without first participating in mediation, the party filing the suit would not be entitled to attorney fees.”
CLLI Source
Navndu Joshi, Esq.: Lingl & Joshi, PLC; Camarillo, CA