Choosing arbitration to mend leasing woesWritten by Michael McKiernan Issue Date: June 2012
|Illustration: Kim Rosen|
With commercial tenancy terms typically measured in five-year blocks, and renewal options that can easily double or triple that length, parties are going to have to get used to living with one another.
Without a reliable way to predict future market conditions, many leases provide for a mid-term rent review, but even when the price is fixed for the first five years, that still leaves a big decision for the following half-decade.
“You have a deal between two parties where they’re committed to a future relationship, but the cost hasn’t been determined. That can be problematic, so really it’s natural there’s going to be issues,” says B.C. lawyer Brian Wallace, who runs an arbitration practice with offices in Victoria and Vancouver.
Landlords and tenants are increasingly turning to arbitrators like Wallace and Toronto-based David McCutcheon to settle these inevitable disputes, attracted by the confidentiality and speed of the process. “Normally, the parties select an arbitrator because they have industry knowledge and expertise that you might not get if you’re in front of a judge, which means they don’t take a lot of time to grasp and resolve those issues,” says Fraser Milner Casgrain LLP partner and dispute resolution specialist McCutcheon. “It’s also procedurally a lot more efficient, I think. I’ve had some on major items that last for six months, which is considerably less than you would get in the courts. Everything is case managed by the arbitrator, so you don’t have to wait for a motion date. You just phone up the arbitrator and say I want to have a motion heard at 9:30 a.m. on some morning, the arbitrator books the time, and you argue the matter.”
Kenneth Glasner, who works as a mediator in Vancouver, says the move to arbitrate has been driven by in-house counsel seeking relief from the spiraling expense and confrontational atmosphere that frequently come with litigation. He compares the landlord-tenant relationship to that between employers and unions. “It’s a long-term relationship and they can’t just dismiss each other, because each has got such a substantial investment in the other,” he says.
According to Glasner, both sides will benefit from drafting an arbitration clause at the time the lease comes into effect, rather than waiting until a dispute has arisen.
“After you hit the dispute, they can certainly still go to arbitration, but there’s often already a lot of animosity at that point. Get it in there at the beginning,” he says.
And while arbitration clauses are becoming almost standard as part of the commercial lease, Glasner says that parties are not always getting the best out of the process. “All too often what happens is the parties will spend a month or two negotiating a commercial lease, and then at the very end, someone will spend two minutes, and say ‘let’s throw in an arbitration clause’ without thinking through the effects of that clause,” he says.
A poorly worded clause can cause problems and delays right from the outset of arbitration, by failing to reflect the wishes of the parties or take into consideration the peculiarities of an individual lease. “Arbitration clauses must be designed uniquely for contract itself. Generally there’s no such thing as a good standard clause,” he says.
Harvey Haber, a senior partner at Toronto’s Goldman Sloan Nash and Haber LLP, says a vague and overly broad agreement to arbitrate any dispute under the lease can “create absolute havoc,” noting that the dollar value and complexity of many disputes may not warrant arbitration and may not be the most efficient mechanism for settling all disputes that may arise between landlords and tenants. “Any provision of the lease could have objections, all of which could give rise to arbitration. Maybe you’re picking a panel of three and you could be talking a fortune already for a relatively minor dispute,” Haber says.
According to Glasner, parties should also give careful consideration to the powers they will hand to the arbitrator in order to keep things moving along, as well as the ability to impose penalties for misbehaviour. “Give the arbitrator powers to deal with games that can be played by one or other of the parties,” he says.
For example, in B.C., one party is unable to move for dismissal of the arbitration for failure to prosecute the claim when there has been a large delay, unless the arbitration agreement specifically provides for that right.
Milton Davis, the managing partner of Davis Moldaver LLP in Toronto, is still scarred by one of his earliest arbitration experiences. As counsel to one of the parties in an eight-year slog, he says it was sometimes difficult to distinguish the case from regular litigation through the courts. “The wound from having been involved in that is something that I won’t forget ever,” says Davis.
Some of the procedures associated with litigation can easily be cut out of many arbitrations, he says. For example, discovery of documents is not always necessary, while oral examination of witnesses can be eliminated in favour of written evidence, with a time-limited cross-examination.
Realizing and exploiting the power they have over their own process is one way parties can cut the costs and time they invest in an arbitration, according to Gerry Ghikas, a litigation and arbitration partner in the Vancouver office of Borden Ladner Gervais LLP. “The parties have an opportunity to write their own rules. If they want, it can be done quick and dirty,” Ghikas says, adding that he’s done entire arbitrations where his total fees come in at not much over $10,000.
That flexibility can be particularly valuable in more straightforward disputes, which could involve smaller retail premises, landlord and tenant appraisals without a gulf between them, or unchallenged assumptions over whether the valuation should be based on the original unimproved space or its current condition. “You don’t want to spend more money resolving the issue than is at stake. Each side has the same interest in that,” Ghikas says.
Wallace points out that arbitration also provides parties with a chance to experiment with different styles of dispute resolution. In one, known as baseball arbitration, both sides present a single best offer and the arbitrator is only allowed to select one as the winner. “There’s a great benefit to that because it really narrows the issues and forces parties to be realistic in what they propose. You know you can’t just hope to fool the arbitrator, because if they don’t fall for it, the risks are too high,” he says.
Glasner also favours flexible rules for examination of experts, including the use of hot-tubbing, which places experts retained by opposing sides in the witness box at the same time, encouraging them to identify areas they agree on and isolate the matters on which they disagree. “All of a sudden, the expert can’t be a prima donna. They’ve got a colleague sitting right there and they can’t get away from it. They have to remember they’re there not for the benefit of the party that retained them, but for the benefit of the decision-maker,” Glasner says.
Another simple way to cut costs and time, according to Haber, is by cutting the number of arbitrators. He says arbitration clauses in commercial leases often provide for a three-person panel, with each side proposing one name, and the two nominees selecting a chair. An extremely complex dispute may call for a larger panel, but Haber says they are the exception. “The difficulty with that is it is horrendously expensive. You’ve got the cost of three arbitrators, where you could be talking $30,000 or $40,000, then the cost of two attorneys, two appraisers, and the whole thing could cost you $60,000,” he says. “It also makes scheduling very difficult, which is going to delay things.”
See sidebar, "Managing leases in a merger."
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