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Alternative Dispute Resolution Clauses for Leases and Real Estate Contracts

Gary Salzman
Gray Robinson
Orlando, FL

Many lawyers and real estate professionals tend to discourage or even prohibit the inclusion of alternative dispute resolution (“ADR”) clauses in their lease agreements and various other real estate contracts. Sometimes this reaction is instinctive without any truly thoughtful evaluation of whether and under what circumstances an ADR clause should be added to any agreement. This article briefly explores a few instances where an ADR clause should be strongly considered. (Although this article is primarily based upon Florida law, the legal principles discussed are likely common and applicable to most other jurisdictions in the United States. Before deciding whether to include an ADR clause in any lease or real estate contract, however, the parties should consult with competent legal counsel licensed to practice law in the applicable jurisdiction.) Before doing so, the two most common forms of ADR are discussed.

Common Forms of ADR

Mediation. Mediation is a process whereby a neutral third person encourages and facilitates the resolution of a dispute between the parties in an informal proceeding to reach a voluntary binding agreement. The mediator does not make any rulings or decisions for the parties. The mediator may not give the parties legal advice, but the mediator may discuss the possible outcomes of the dispute if not settled, as well as the strengths and weaknesses of the parties’ positions.

The parties may agree on the appointment of any neutral person (other than a presiding judge) to act as the mediator, and as long as the parties agree, the mediator typically does not need to be certified. Depending on the level of “reality checking” the parties would like the mediator to undertake, the parties should consider the substantive experience of the mediator in the area of the dispute. In the absence of the parties’ agreement, the court may only appoint a certified mediator to conduct the mediation conference.

It is a common practice for the parties to provide the mediator with summaries of the facts and legal issues for the dispute, as well as the prior settlement negotiations. These summaries are usually confidential, privileged communications, and are very helpful for the mediator to determine how best to approach the mediation.

The parties’ representatives are required to attend the mediation conference with full authority to settle. That means the person attending the mediation is the final decision maker with respect to all issues presented by the dispute and has the legal ability to execute a binding settlement agreement. For the most part, the mediation conference is conducted in at least two stages:

  1. Joint session: The mediator will normally conduct a joint session in which the mediator and then each attorney will give brief opening statements. There are times when the mediator may not conduct a joint session, such as when emotions are at extreme levels and the parties are in a state of high conflict. These situations should be weighed against the need for the parties to have their opportunity to address each other directly or through counsel so that they will be able to move past their conflict toward resolution.
  2. Private caucus: After the joint session, the mediator often will separate the parties and their attorneys into private sessions or caucuses in which they may feel free to candidly discuss other aspects of the dispute with the mediator, including how it may be resolved.

Although attendance at any court-ordered mediation is mandatory, participation in settlement negotiations is completely voluntary. It is a party's right to refuse to compromise or settle any claim and to have their “day in court.” Indeed, a mediator may not make substantive decisions for any party, but the mediator is responsible for assisting the parties in reaching informed and voluntary decisions while protecting their right to self-determination. The mediation conference is an opportunity for the parties to control the outcome of the dispute and fashion a resolution that is certain and may encompass terms that an arbitrator or a court may not be able to award.

Arbitration. As opposed to mediation, arbitration results in a binding or nonbinding decision of the dispute by one or three neutral third parties. The arbitrator or panel of three arbitrators considers the evidentiary presentations of the parties and then renders an award, which may then be confirmed by a court.

All arbitrations have a common component—each is based upon an arbitration agreement. An arbitration agreement can be included as a clause or paragraph in a broader contract, or it can be a stand-alone agreement that is entered into before or even after a dispute arises. The latter is termed a “submission agreement” because the parties agree to submit their pending dispute for resolution by arbitration.

Arbitration agreements must have certain basic terms to be binding upon the parties. With certain exceptions, arbitration agreements must be in writing and signed by the parties. The agreement must describe the scope of the controversy or claim to be arbitrated and whether the arbitration will be binding or nonbinding. The arbitration agreement should also identify the arbitration rules to be applied for the proceeding and whether the arbitrator or an ADR organization will administer the proceeding.

An arbitration agreement may also adopt various other customized requirements. However, all arbitration agreements must comport with basic due process considerations and be fundamentally fair to be valid and enforceable. The following are some examples of additional requirements that should be considered:

  • One arbitrator or a panel of three arbitrators
  • The specific minimum qualifications for the arbitrators and whether those qualifications should be objective or subjective criteria
  • The method and responsibility for payment of the administrative fees and costs as well as arbitrator compensation
  • Summary procedures or emergency rules to expedite the proceeding
  • The locale for all hearings
  • The use of and limitation on any discovery tools, such as depositions

While the order of the arbitration proceeding is at the arbitrator’s discretion, the hearing generally begins with each party giving an opening statement to clarify the issues. The complaining party then presents evidence, followed by the responding party’s presentation of evidence. Each party also has the opportunity to cross-examine opposing witnesses. Finally, the parties are given the option to give written or oral closing arguments. The arbitrator’s discretion in conducting the final hearing also includes the power to determine the admissibility, relevance, materiality and weight of any evidence.

One of the hallmarks of the arbitration hearing is its informality. In fact, one of the purposes of an arbitration agreement is to avoid some of the formal rules of a court proceeding, such as the strict application of the rules of evidence and civil procedure. Hearsay evidence is usually admissible to a limited extent, leading questions may be asked and witnesses need not always be qualified as “experts.” Nevertheless, each party must be given an equal and fair opportunity to be heard and present evidence.

Once the arbitration hearing is concluded, the arbitrator or arbitration panel must make a “record” of the award. The record must be signed or otherwise authenticated by all arbitrators who concur with the award. The arbitrator or the arbitration organization must give notice of the award, including a copy of the award, to each party to the arbitration proceeding. The arbitrator is not required to make specific findings of fact and conclusions of law, unless the arbitration agreement expressly requires the arbitrator to do so or a court remands the matter to the arbitrator for express findings to be made before any confirmation of the award will be entered.

ADR Clauses for Leases         

One of the most common landlord concerns on whether to include an ADR clause in a lease is that the selected ADR process, whether it be mediation or arbitration, will delay the landlord’s ability to retake possession of the subject premises where a tenant fails to pay rent. Under those circumstances, any ADR process is not recommended, unless there is a serious contest over the amount of rent that is due. However, there are many other types of lease disputes where this concern is not applicable and, given the nature of the dispute, ADR may be a preferred method of resolving the dispute.

For example, a lease may grant an exclusive use to an anchor tenant within a retail shopping center, thereby restricting the landlord from leasing any other portion of the center to another tenant for the same or an overlapping use. If a dispute arises as to whether another tenant’s actual use violates the exclusivity clause in the anchor tenant’s lease, the parties may desire to have the dispute resolved first by mediation and then, if no resolution is reached, by binding arbitration before a panel of three neutral arbitrators.

The mediation clause could require the mediation to take place within a very short period of time after the anchor tenant declares a violation of the lease, but before either party commences an arbitration. The mediation clause may require the mediator to be a certified mediator and also have a minimum number of years of experience as a real estate lawyer, or be board certified in real estate law or business litigation by the state bar association in which the center is located. The following is a sample mediation clause for a shopping center in Florida to that effect:

Except for any claim relating to Tenant’s default in the payment of rent, Landlord and Tenant agree to submit any and all other claims, controversies and disputes between Tenant and Landlord arising out of or relating to the Premises, this Lease or the parties’ performances due hereunder to mediation pursuant to the mediation rules contained in applicable Florida Statutes and Florida Rules of Civil Procedure prior to demanding arbitration. Landlord and Tenant agree to maintain all communications made at such mediation in the strictest confidence between themselves and their counsel, unless otherwise required to disclose same pursuant to applicable law. The mediator for any such mediation shall be a Florida certified circuit-civil mediator and also Board Certified by The Florida Bar in Business Litigation or Real Estate Law. The mediation shall be conducted within thirty (30) days from the date any such claim, controversy or dispute is declared in writing to exist by any party to the opposing party.

Similarly, the arbitration clause in the lease could further provide that: (a) the panel chairperson for the arbitration must be an attorney who is board certified in real estate law or business litigation; and (b) the two other arbitrators must be non-lawyer, commercial property managers with at least 15 years of experience with managing shopping centers. The arbitration clause may also limit discovery and require the final hearing to be conducted within a short period of time. By doing so, the parties will have a streamlined, expeditious process to resolve their dispute and then (hopefully) continue their business relationship with as little acrimony as possible. The following is a sample arbitration clause for the Florida shopping center:

Except for any claim relating to Tenant’s default in the payment of rent, any and all other claims, controversies and disputes between Tenant and Landlord arising out of or relating to the Premises, this Lease or the parties’ performances due hereunder shall be resolved by binding arbitration administered by and in accordance with the commercial rules of the American Arbitration Association, and any court of competent jurisdiction shall enter final judgment on any such final award rendered by the arbitrators.

All defenses and claims which would otherwise be available to the parties in any court proceeding, except for class actions, shall be available in arbitration. Arbitration of class claims under this Agreement shall not be permitted by the Arbitrators, and each arbitration claim encompassed by this Agreement shall be administered and determined in separate proceedings. The arbitration proceeding shall be conducted in the county in which the Premises are located no sooner than sixty (60) days and no later than one-hundred twenty (120) days after any written demand for arbitration is served upon the respondent for the proceeding.

The arbitration proceeding shall be conducted by a panel of three (3) neutral and impartial arbitrators. Said panel shall be comprised of arbitrators with the following minimum qualifications: (a) one arbitrator, who shall be the chairperson of the panel, shall be Board Certified by The Florida Bar in Business Litigation or Real Estate Law; and (b) two arbitrators shall be nonlawyer commercial property managers with at least fifteen (15) consecutive years of substantial experience managing retail shopping centers in Florida.

The parties to the arbitration proceeding shall be permitted to take no more than three (3) depositions, not to exceed five (5) hours each. The parties shall also be entitled to discover documents through the use of requests for production. All discovery shall be governed by applicable Florida Rules of Civil Procedure. The arbitrators shall be bound by and shall follow the choice of law provision set forth in the Lease for the rendering of any final award. Any final award shall reflect the arbitrators’ reasoning for the award, but shall not be required to state findings of fact and conclusions of law. Each party to the arbitration proceeding shall equally advance all costs and compensation of the arbitrators, which advances shall be awarded to the prevailing party in the final award.

The arbitrators shall have the jurisdiction and authority to award reasonable attorneys’ fees of the prevailing party. The arbitrators and the parties shall maintain any such arbitration proceeding, all papers filed therein, and the substance of the underlying dispute for the arbitration proceeding in the strictest confidence between themselves and their counsel, unless otherwise required to disclose same pursuant to applicable law.

ADR Clauses for Real Estate Contracts      

As with leases, parties to a real estate contract, such as a contract for the sale of property, are also reluctant to agree to an ADR clause that could cause any delay in seeking relief where one party violates the contract without any colorable justification. An example of such a situation would be where a buyer simply fails to pay for the balance of the purchase price due under a contract for sale without any justification or legal excuse. Under those circumstances and depending on the remedial terms of the contract, the seller will most likely want to seek immediate redress with a court either to enforce the contract through specific performance, obtain a damage award or retain any deposits.

In other instances where a default is substantively contested, the parties may be better served by first mediating and then arbitrating their dispute. The mediation may result in an amicable settlement and modification to the contract so that the transaction may be closed or rescinded without substantial delay and incurring substantial litigation attorneys’ fees and costs. If the mediation is unsuccessful, an arbitration may then expedite the determination of the dispute with a panel of arbitrators with specialized knowledge in the subject matter of the contract or the type of property under contract.

As an example, a seller and buyer may enter into a contract for the sale of a retail shopping center, which is conditioned upon the partition and rezoning of an outparcel that the seller will retain. The contract provides for a specified period of time to complete the partition and rezoning, but allows for limited extensions where the seller can demonstrate that it is “diligently pursuing” these efforts. The buyer later determines that the seller is delaying the partition/rezoning process for various reasons, causing the buyer’s interest lock on its purchase money financing to expire. The buyer declares a default under the contract and the seller contests whether a default occurred. If the parties commenced litigation, they most likely would not receive any judicial determination for one to two years (or more), after which the property value and financing terms would have significantly changed. If the parties included ADR clauses in the contract, however, they could reach a voluntary resolution of the dispute at mediation that would permit them to move forward with the transaction or unwind it in a fair manner. If no resolution is reached, they would submit the matter to binding arbitration for a quick, definitive determination of the issues. The following is a sample mediation clause for a contract for sale of a Florida shopping center:

Where a default has been declared in writing in accordance with the terms of this contract and where the declaration of default is contested in writing within ten (10) days from the declaration of default, the parties shall submit any and all claims, controversies and disputes between them arising out of or relating to the declaration of default and the contest of default to mediation pursuant to the mediation rules contained in applicable Florida Statutes and Florida Rules of Civil Procedure, prior to demanding arbitration. The parties agree to maintain all communications made at such mediation in the strictest confidence between themselves and their counsel, unless otherwise required to disclose same pursuant to applicable law. The mediator for any such mediation shall be a Florida-certified circuit-civil mediator member and also Board Certified by The Florida Bar in Business Litigation or Real Estate Law. The mediation shall be conducted within thirty (30) days from the date any default is declared in writing by any party to the opposing party.

Should the mediation not result in a settlement, the parties would proceed to binding arbitration. To ensure that the arbitrators had relevant knowledge and experience, the arbitration clause may provide that: (a) the panel chairperson must be an attorney who is board certified in business litigation; and (b) the two other arbitrators must be an attorney who is board certified in real estate law and a non-lawyer, commercial real estate broker with at least fifteen (15) years of licensure as a real estate broker in Florida.

As with the lease example, the arbitration clause could also limit discovery and require the final hearing to be conducted within a short period of time. The same arbitration clause as with the lease example above could be used, with the following substituted paragraphs:

Where a default has been declared in writing in accordance with the terms of this contract and where the declaration of default is contested in writing within ten (10) days from the declaration of default, the parties agree that any and all other claims, controversies and disputes between them arising out of or relating to the declaration of default and the contest of default shall be resolved by binding arbitration administered by and in accordance with the commercial rules of the American Arbitration Association, and any court of competent jurisdiction shall enter final judgment on any such final award rendered by the arbitrators.                      

The arbitration proceeding shall be conducted by a panel of three (3) neutral and impartial arbitrators. Said panel shall be comprised of arbitrators with the following minimum qualifications: (a) one arbitrator, who shall the be chairperson of the panel, shall be Board Certified by The Florida Bar in Business Litigation; (b) one arbitrator shall be Board Certified by The Florida Bar in Real Estate Law; and (c) one arbitrator shall be a nonlawyer commercial real estate broker with at least fifteen (15) consecutive years of licensure in Florida as a real estate broker.

Conclusion

With careful drafting and thought, ADR clauses should be seriously considered for any commercial lease or real estate contract. There are many instances where the parties to these agreements would be well served by ADR. The parties may obtain the assistance of a mediator for settlement or a ruling of an arbitrator or panel of arbitrators with specialized knowledge and experience in the particular transaction or property at issue. The parties’ rights are still protected by basic due process and fundamental fairness, but the formal rules of court generally do not apply. As a result, the fees and costs of ADR are typically (but not always) less than those incurred for contentious litigation. At a minimum, parties should carefully consider whether to include ADR clauses in their agreements and, if so, under what circumstances and terms.

***This article is for informational purposes only, is not legal advice and does not establish an attorney-client relationship.The reader of this article should seek appropriate legal advice from a licensed attorney before making any decision based on these comments. The hiring of a lawyer is an important decision that should not be based solely upon advertisements.

 

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Gary Salzman is a shareholder in Gray Robinson in Orlando, FL. He primarily handles litigation, mediation and arbitration for business, real estate and employment disputes. Mr. Salzman is board certified by The Florida Bar in business litigation and has previously served for six years on The Florida Bar’s Business Litigation Certification Committee.