Use One Arbitrator to Minimize Extension Option Arbitration Costs

If you’re like many commercial real estate owners, you’ve considered using “alternative dispute resolution” (ADR) methods, including arbitration, to resolve your differences with tenants out of court. For example, when you and a tenant are certain you disagree on a single, clear-cut issue, arbitration may be the best place to start. That’s why many leases provide that if the parties cannot agree on a renewal/extension rent, then such rent is to be determined by three arbitrators, with each side picking one arbitrator, and the two arbitrators picking a third, explains Toronto attorney, mediator, and arbitrator Harvey M. Haber.

            Don’t do it, if you can possibly avoid it, Haber warns. Instead, you can adapt and use our Model Lease Clause: Specify One Experienced Arbitrator for Extension Option, to carve out the right to use a single arbitrator for renewal/extension rent disputes.

ADR Expenses Spiral Out of Control

Why shouldn’t you agree to use three arbitrators for a dispute? “Three arbitrators are just too expensive,” stresses Haber. “Let’s presume the retail space in question is 1,500 square feet, the tenant is paying $18 per square foot per annum, and the owner has indicated that it wants $25 per square foot per annum during the renewal/extension term,” says Haber. If the parties don’t agree and under the lease three arbitrators are required, costs could spiral out of control. “For example, now let’s take a look at the cost of choosing the three arbitrators, assuming that each arbitrator is at the rate of $500 per hour and that the arbitration will be for one day, comprising approximately eight hours, so that the cost for the three arbitrators for that one day arbitration is $12,000 ($500 x 8 = $4,000 x 3 = $12,000),” he adds.

            “Each side then generally designates its own counsel, and assuming that counsel’s hourly rate is also approximately $500 per hour, counsel’s cost for that one-day arbitration would be $8,000 ($500 x 8 = $4,000 x 2 = $8,000).” Haber points out. Each side also has to pick a designated appraiser for the property to determine the fair market rent during the renewal/extension term, and assuming the appraiser’s cost is also $500 per hour, its cost for the day would be $8,000 ($500 x 8 = $4,000 x 2), he notes.

            In that scenario, the cost for the arbitration for that single day would total $28,000. Even when that amount is divided by two—as the owner and tenant would each pay 50 percent of the arbitration cost—the cost is enormous: $14,000 for each party for that single day of arbitration.

            When deciding whether to negotiate provisions requiring three arbitrators, consider the possibility that the arbitration could take more than just one day, as many do, Haber emphasizes. “In my opinion, it is just too much money for either party to go to a three-panel arbitration, unless, of course, the amount involved in the dispute is extremely high,” Haber advises.

Cut ADR Costs Substantially

Instead, Haber recommends having both parties agree on a single experienced, qualified commercial arbitrator, which will cut down the costs substantially. And both parties pick a single appraiser, who both agree is fair, experienced, and knowledgeable in real estate, which will also cut down the cost of the arbitration even further, says Haber.

Insider Source

Harvey M. Haber, Q.C., J.D., LSM, DSA, IMI Certified Mediator, C. MED., C. ARB., B.A.: Senior Partner, Goldman Sloan Nash & Haber LLP Barristers & Solicitors, 480 University Ave., Ste. 1600, Toronto, Ontario M5G 1V2; haber@gsnh.com; www.gsnh.com.