In rent arbitration, less can be more

Hiring a panel of three arbitrators often not worth the cost
Tuesday, August 6, 2013
By Harvey M. Haber

Many leases stipulate that if a building owner or manager cannot agree with a tenant on a price for the renewal or extension of a property’s rent, a panel of three arbitrators will determine the amount.

The role of the arbitrator – or in this case, three arbitrators – is to decide which issues are in dispute. The panel then offers its binding ruling on what a fair price for rent should be.

The management and tenant each pick their own arbitrator, and the two arbitrators settle on a third to act as the chair. Traditionally, both parties go with a panel of arbitrators in an effort to ensure fairness.

But property managers and tenants should avoid hiring a trio of arbitrators, if possible – doing so can stretch out the dispute and simply cost too much money.

Here is a scenario to illustrate how the costs associated with three arbitrators can set both parties back a fair amount.

Arbitration costs add up
In a retail space of 1,500 square feet, let’s say the tenant currently pays $18 per square foot per annum. During the renewal or extension of the lease, the property owner or manager says it now wants $25 per square foot per year. Neither the management or tenant wants to budge, so they hire three arbitrators as required by the lease.

The standard rate for each arbitrator is approximately $500 per hour. Assuming the arbitration lasts a (eight-hour) day, the cost for the three arbitrators is $12,000, with each party paying $6,000. It’s important to note that the length of an arbitration can vary. Some arbitration processes can be resolved in a few hours, while others can take months. The longer it takes, the more both parties pay.

Arbitrators are not the only “objective” people involved in rent arbitration. Each party usually has its own counsel, which cross-examines the other party’s witnesses and appraiser. Counsel usually charges $500 per hour, so that will add another $4,000 each to the management and tenant’s total.

Finally, both parties need to agree on what the property and, accordingly, rent is worth. Each side will often pick a designated appraiser, both of which decide upon the fair market rent during the renewal or extension of the lease. At another $500 per hour (on average), the cost adds another $4,000 to each party’s total.

This brings the total cost for the one-day arbitration hearing to $28,000 – or $14,000 for each party.

So, what should a building owner or manager do if it cannot agree with the tenant on a price for the renewal or extension of a property’s rent?

Instead of going the “traditional” route, management and the tenant should try to agree upon a single experienced and qualified commercial arbitrator. Doing so can cut down the costs of arbitration substantially and speed up the actual process. Resources like the Alternative Dispute Resolution (ADR) Institute of Canada can act as a third party and offer suggestions for a qualified arbitrator, meaning the issue of fairness is put to rest.

Both parties can also receive names and suggestions for a single appraiser through the ADR Institute. The neutral party can recommend an appraiser that both the tenant and landlord can agree is fair, experienced and knowledgeable in the trade, which will cut down the costs even further.

However, there are times when a three-panelled arbitration with individual appraisers and counsels is worth the cost. If the price in question is high and both parties are offering figures that are tens of thousands of dollars apart, spending an extra amount during the arbitration process could be in both parties’ best interest.

In many instances, though, the money at stake during a dispute about a rent increase is not necessarily worth the high costs associated with the traditional panel of arbitrators. Instead, property owners or managers and tenants will find it in their best interest to work together and save their money.

Harvey M. Haber, Q.C., is a senior partner at Goldman Sloan Nash & Haber LLP, where he specializes in commercial leasing. Backed by more than 40 years of experience, Harvey was named one of Canada’s most frequently recommended property leasing lawyers by the Canadian Legal Lexpert Directory. He is also listed in the Lexpert/American Lawyer Guide to the Leading 500 Lawyers in Canada.