Use ‘Expedited’ Arbitration to Control Tenant's Special Rights

In today's real estate market, you may have to give a major tenant (such as a “big box” retailer) special lease rights—for example, a cotenancy right, an offset right, a self-help right, or a lease termination right—that it can exercise if you violate certain lease provisions. But giving these rights can put you in a very vulnerable position. For instance, the tenant could offset rent during a lengthy court battle or threaten to terminate the lease if you don't give in to its demands. You could be left with a tenant that's paying you no rent for years while you fight it in court. Or you could be forced into a game of “chicken” and stuck with a dark space.

To protect yourself, have the tenant agree in the lease that you may demand an “expedited”—that is, sped up—arbitration to settle a dispute on whether it may exercise any of these special rights, advises Seattle attorney William H. Block. And make sure the tenant's ability to exercise those special rights is “tolled”—that is, suspended—until the arbitrator issues a decision, he says. Then, if you're found to have violated the lease, give yourself additional time to “cure”—that is, correct—the violation, he adds. There's a Model Lease Clause on p. 3 that you can adapt and use in your leases that sets this out.

How to Add Expedited Arbitration to Lease

Here's how to set up the expedited arbitration procedure in your lease, advises Block:

Get right to send disputes over special rights to expedited arbitration. Say that if you dispute the tenant's claim to offset, self-help, or any of its other special rights, you may demand that the matter immediately be sent to expedited arbitration before the tenant can exercise those special rights, says Block [Clause, par. a].

Pick only one arbitrator. Although many arbitrations have three arbitrators, it's faster to have only one arbitrator, Block advises [Clause, par. a(ii)]. The downside is that you lose the benefit of multiple arbitrators “moderating” each other—that is, keeping each other in line, he admits. If you're uncomfortable with this arrangement, you may want to add more arbitrators.

Arrange for fast notice. A typical notice provision in a lease may require that you and the tenant send notices and demands by certified or registered mail. But with expedited arbitration, time is crucial. So say that you and the tenant can give any notice or demand (including your demand for arbitration) by telephone or fax. Then you or the tenant must send a copy of the notice or demand by messenger or overnight courier so that there's proof of the notice or demand, suggests Block [Clause, par. a(iii)].

Select mutually acceptable arbitrator. Say that you and the tenant will attempt to select a mutually acceptable arbitrator quickly—say, within three business days—after your demand for arbitration, says Block [Clause, par. a(ii)]. You and the tenant may even decide to agree in advance (formally or informally) on an arbitrator, he adds. This will be faster than having an arbitration service—for example, the American Arbitration Association (AAA)—select one, and should lead to a more satisfactory result because both you and the tenant should feel comfortable with the arbitrator, he explains.

Go to arbitration service if you can't agree. Since you're at odds with the tenant, you may not be able to agree on anything—including which arbitrator to pick, warns Block. In that case, require the arbitration service to select an arbitrator from its panel of real estate arbitrators, without the submission of lists of proposed arbitrators, suggests Block. With AAA arbitrations, this avoids the lengthy regular process in which the AAA prepares a list of AAA-approved arbitrators, then you and the tenant review the list, strike off names of undesirable arbitrators, and return the list to the AAA for a final selection, he explains. Also, say that you and the tenant can challenge the AAA's selection only for good cause, he says [Clause, par. a(ii)].

Limit arbitrator's authority. Spell out that once selected, the arbitrator is authorized to decide only the issue of the tenant's exercise of the special rights, says Block [Clause, par. a(ii)]. The arbitrator shouldn't rule on any other dispute between you and the tenant, because that could unnecessarily prolong the arbitration and let the arbitrator delve into areas you don't want him meddling in, he explains.

Have arbitrator set hearing date and place. To avoid disputes with the tenant over the logistics of the arbitration (and consequent delays), say that the arbitrator will pick the time, date, and place of the hearing. Then the arbitrator will notify you and the tenant of this information, says Block [Clause, par. a(iv)].

Set short arbitration period. To reach a quick result, agree on how long the arbitration process will take—from the date of your demand for arbitration to the arbitrator's decision. Block recommends that you and the tenant agree that the arbitration process will take no more than 25 days [Clause, par. a(i)]. To keep everyone to this schedule, limit “discovery” procedures—that is, letting one party demand that the other party produce all sorts of documents or answer questions—before the hearing, Blocks says. Also, bar the parties from submitting legal documents after the hearing, unless the arbitrator decides otherwise, he adds [Clause, par. (v)]. And require the arbitrator to promptly announce his decision—say, within seven days after the hearing ends, Block advises [Clause, par. a(vi)].

With a time limit, there's a risk that any delay in the process could potentially invalidate the entire procedure, warns Block. So protect yourself by saying that a delay won't affect the arbitrator's ability to decide the case, he advises [Clause, par. a(vii)].

Suspend tenant's special rights pending decision. Say that the tenant's ability to exercise its special rights is tolled until the arbitrator issues a decision in the dispute, says Block [Clause, par. b].

Get additional time to cure. If the arbitrator's decision is in favor of the tenant, get some additional time to cure the violation, says Block [Clause, par. b]. This helps you undercut the tenant's demand that you either give it what it wants now or suffer the consequences of exercising its special rights, he says. If the tenant objects to this additional cure period, point out that it's only fair that you get a quick, neutral decision on any dispute, and time to cure, before you're subject to drastic consequences, Block suggests.

Let arbitrator assess costs. Give the arbitrator the right to assess the arbitration costs and determine who will pay how much, says Block [Clause, par. c]. This may discourage the tenant from making groundless claims.

Will Tenants Accept Expedited Arbitration?

A major tenant should be willing to accept this expedited arbitration procedure, says Block. The selling point to the tenant is speed. The procedure is so quick that the tenant will promptly get to exercise the special right it's entitled to if the evidence shows that you violated lease, he explains.

CLLI Source

William H. Block, Esq.: Member, Buck & Gordon LLP, 1011 Western Ave., Seattle, WA 98104-1097; (206) 382-9540.