Use Mediation Instead of Jumping to Arbitration or Court Over Dispute

When you think about settling a dispute with a tenant without going to court, arbitration as an alternate dispute resolution method might immediately come to mind. That’s because arbitration is widely known and talked about in commercial real estate. But before you pursue arbitration, consider resolving a dispute by submitting the dispute to mediation.

That’s because mediation is typically faster and more economical and efficient than either fighting in court or using the more traditional out-of-court strategy of arbitration. Plus, mediation fosters, rather than destroys, the landlord-tenant relationship by letting you and the tenant work together to create a mutually satisfactory solution. And if the mediation doesn’t work, you can always move on to arbitration or the courts. Making it your first step in the process is worth it. Here’s how you can use mediation for a fast and economical way to settle disputes.

Learn How Mediation Works

Mediation is widely used to settle commercial lease disputes. Sometimes, courts require that owners and tenants first try to settle their disputes in mediation before proceeding with a lawsuit. Mediation can be made even simpler and smoother if you understand it.

Mediation is a dispute resolution technique that lets parties solve their own disputes. Although many people think mediation is the same as arbitration, it’s not. With arbitration, either one arbitrator or a panel of three arbitrators decides your dispute after weighing the merits of both sides. With mediation, one mediator listens to both sides and helps them reach a solution. The mediator doesn’t decide anything—he or she has no decision-making authority. Rather, the mediator is really an agent of realistic thinking (a “neutral”) whose role is to get the parties talking so they can fashion their own solution. The mediator can propose solutions and use his or her knowledge and experience to help the parties resolve their differences.

Choose Mediators and Mediation Services

You have some choices when deciding where you should go if you want to mediate a dispute. The best-known resources are:

Popular dispute resolution service providers. Many people choose to mediate their disputes at the most well-known mediation service providers—such as the American Arbitration Association (AAA). But even though the AAA is one of the largest and most popular providers of dispute resolution services in the nation, it’s not the only one. For example, JAMS and many smaller private providers offer dispute resolution services.

Panels. Community organizations, the federal government, and various court systems have created mediation panels to hear disputes.

Private companies. Some private companies also offer mediation services, for a fee.

Ad hoc. There are many “ad hoc” mediations taking place—that is, the parties to a dispute will directly contact a mediator whom they know, rather than use a mediation service. But often parties in disputes have difficulty agreeing on a mediator. That’s why it can be a money and time saver to name a mediation service in the lease.

Advantages in Settling Landlord-Tenant Disputes

Here’s why it’s worth trying mediation to settle a commercial leasing dispute:

High success rate. The success rate for mediation can be very high. A large percentage of the mediations that are started voluntarily have successful results. The success rate for mediations ordered by a court is typically lower. But that’s to be expected because a court is forcing the parties to settle at a point when they don’t want to. Voluntary mediation indicates that both, or at least one side, wants to work things out.

Knowledgeable mediators. You can pick a mediator with expertise in commercial leasing. That expertise should help foster a fast and fair settlement. If you wind up in court, your case might be heard by a judge who has little or no commercial leasing knowledge. Because of this lack of knowledge, the judge’s decision may not be an informed one unless your attorney spends time and your money teaching the judge about commercial leasing.

Quick settlements. Mediation is fast—the vast majority of mediations last only one day. That means you’ll know rather quickly if mediation will or won’t work for you. Moreover, it takes very little time to prepare for the mediation. So, from beginning to end, the process will usually take only a fraction of the time you would spend on a lawsuit or in arbitration.

Lower costs. Mediation is much less expensive than arbitration and far less costly than a lawsuit. The speed of the mediation process cuts down on total costs. Plus, the actual fees and charges are typically lower. In an arbitration, each party pays a higher administrative fee than in mediation, which can reach into the thousands of dollars, depending on the amount of the claim. On top of that, you’ll pay a fee to each arbitrator (and there could be three). That fee could vary greatly depending on such factors as whether the arbitrator has a lot of experience in mediation and commercial leasing, as well as where the arbitration takes place (in a high-priced city or low-priced suburban area).

Even worse than mediation or arbitration: The cost of commercial real estate litigation can easily run into the tens of thousands of dollars.

Less hostility. The mediation process is less hostile than arbitration or litigation, where there’s often a winner and a loser. When a mediation is over, you can often salvage the business relationship—so you won’t lose the tenant. You may even enhance your relationship with the tenant because you’ve worked through your problem together. That’s especially important if the tenant is a critical piece in the synergy puzzle you’ve assembled at your retail property, and losing it would affect not just your cash flow but also other tenants’ rights. 

Tailor-made results. Because the goal of mediation is for you and the tenant to work out a mutually acceptable solution, you can explore alternatives other than the one-sided results often sought through arbitration or litigation. For example, suppose you’re arguing over who should pay certain repair costs. You and the tenant might agree that you’ll pay them—but that you’ll also get a slight rent hike from the tenant to partially reimburse you.

Practical Pointer: Most commercial leasing issues could easily be resolved through mediation—for example, how much fair market value is when setting renewal rent; what’s “reasonable” consent to an assignment, sublet, or tenant alterations; who must take on repair or maintenance responsibilities that aren’t clear in the lease; and whether new costs that aren’t specifically listed in the lease should be included in CAM costs or operating expenses, among other commercial leasing controversies.

Aspects of Mediation to Decide On

It’s best to carve out a right to mediation in the lease, but you can mediate a dispute even if the lease doesn’t have a clause calling for it. You and the tenant can agree at the time of the dispute to try mediation. But putting a mediation clause in the lease improves the odds of getting a mediation off the ground. It could be tougher to get the tenant to the table if it hasn’t already agreed to mediate.

Like our Model Lease Clause: Explore Mediation as First Stop to Dispute Resolution, yours should include some general points, but ask your attorney to customize it for your specific situation.

Good-faith effort. Make sure that while your clause requires you to make a “good-faith” effort to mediate, you specify that you or the tenant can walk away from the mediation at any time if you’re not happy with how it’s progressing.

Exclude some situations. Be aware that there may be disputes that you won’t want to mediate. For example, many states allow owners to use a quick court procedure if tenants stop paying rent. If you have access to a faster or easier legal solution for a certain issue or type of dispute, you may want to exclude that issue or dispute from mediation.

Mediator selection. Also designate in the clause who will mediate and that you will follow that service’s mediator selection procedures, in the event you have to use it.

Time limit. You can also keep a tight control on costs, by putting a time limit on the mediation process and/or a dollar limit on its cost. For example, you may want to specify that the mediation can’t take more than three days or else the dispute will go to arbitration or litigation. But there’s a drawback to limits: They may stifle the negotiation process. So carefully weigh the considerations before adding them to your lease.

Cost responsibility. It’s a good idea to specify who pays the mediation costs. The general practice with most mediations is for the parties to split the cost. This approach gives both sides an incentive to reach a quick resolution. However, occasionally, one party will agree to pay somewhat more than half to induce the other side to come to the table.

Requirement to mediate. You might want to add some teeth to your clause to compel a tenant to try mediation before bringing its dispute to arbitration or court. For instance, you might say in the lease that if the tenant sues without first attempting to mediate, it won’t be entitled to recover attorney’s fees from you, even if the tenant would otherwise be entitled to them. Or you might give yourself the right to ask a court to block the tenant from suing before trying mediation.

But compelling the tenant to use mediation may not always be the answer. If the tenant isn’t interested in settling a dispute through mediation, you’re probably better off letting the dispute go straight to arbitration or litigation.

What Happens at a Mediation?

The typical mediation process involves these five steps:

Step #1: Request mediation. If you’ve put a mediation clause in your lease and a dispute arises, your first step is to notify the other side and your mediation service that you want to schedule a mediation.

Step #2: Find a mediator. Many mediators are attorneys, retired judges, or business people with expertise in the disputed area. Check that any mediator that you approve has a thorough understanding of commercial leasing and the laws relating to your case.

Step #3: Prepare for the mediation. The mediation will probably be scheduled about three to six weeks after you request it—at a mutually convenient time. Before you get to the mediation table, decide what the ideal resolution is for you and how far you can bend. Are your expectations reasonable? Also, gather any documents or receipts that could be helpful.

Step #4: Participate in the mediation. The mediation will start with all parties in the same room. You don’t need an attorney. But it’s common to have one present when mediating a big or complicated case. The mediator will ask each side to make oral opening statements outlining the issues in dispute. Next, the mediator will often take you and the tenant into a separate room and speak privately with each of you. This process is called caucusing. It lets the mediator determine your and the tenant’s real expectations and how far each of you will go to clear up the dispute. The mediator won’t divulge this information to the other side without your consent.

Next, everyone reassembles and tries to work out a mutually agreeable solution. The mediator can caucus again if he or she feels it’s necessary.

Step #5: Follow through on the result. If you and the tenant reach a solution, it’s up to both of you to follow through on what’s decided. Mediators have no power to make a solution legally binding. But you and the tenant can choose to make your solution binding by signing a settlement agreement. If the tenant doesn’t comply with the settlement agreement, you can have it enforced against the tenant by a court.

If you and the tenant don’t reach a solution, either of you can walk away at any time and try any other dispute resolution method you’ve provided for in the lease. There’s no record of the mediation; the information from the mediation is kept confidential. But there may still be a benefit: The mediation may have moved the parties closer to a solution, which could make a future arbitration or lawsuit easier to resolve.