Negotiating an Acceptable Arbitration Clause in Your Commercial Lease

June 5, 2013

One component many commercial landlords and tenants overlook in their commercial leases is the arbitration agreement. While all landlords and tenants enter new relationships with high hopes that no problems will occur, ignoring the terms of an arbitration agreement is a mistake, and can prove costly should you encounter bumps down the road. Whether you are a tenant or a landlord, you and your legal counsel should ensure that you only approve an arbitration agreement that makes business sense for you.

One element to note is the existence of two types of arbitration: binding and nonbinding. In binding arbitration, the arbitration proceeding is the final decision-maker, and both sides must adhere with the decision. Nonbinding arbitration allows either party, if unsatisfied with the outcome, to proceed to court with the dispute. Obviously, nonbinding language offers the advantage of additional avenues of recourse in the event of an unsatisfactory decision, but also presents the risk of greater expense, should the dispute result in both arbitration and litigation. If you decide to include an arbitration agreement in your lease, it is important to determine whether you have greater confidence in arguing your dispute before an arbitrator or a court, and construct the agreement accordingly.

As you weigh whether to include an arbitration clause in your lease, costs also make up an important decision-making factor. In some cases, settling disputes through binding arbitration may be cheaper than litigation, as the expense of preparing for an arbitration may be less than a full-blown civil litigation in court. Additionally, arbitration offers a heightened degree of privacy. The information related to arbitration cases do not constitute public records; whereas, if your dispute goes to court, everything becomes open to the public, unless the judge seals the records (which is extremely rare.) If your business would gain from keeping its commercial landlord-tenant disputes private, establishing a binding arbitration agreement may provide significant benefit.

Additionally, arbitrators have expertise in the area of commercial leasing disputes, where a judge might not. Having an arbitrator serving as your fact-finder, who has detailed knowledge of the commercial leasing industry, likely will make the dispute resolution process more efficient, as the parties may simply present their cases, without having to educate the fact-finder about nuanced aspects of industry-related knowledge.

If you are a commercial tenant, and wish to avoid signing an arbitration agreement, options exist for negotiating out such a clause. Many commercial landlords fear the potentially large expenses of a jury trial. You may persuade your landlord to drop its arbitration clause in exchange for a waiver of your right to a jury trial.

Negotiating commercial leases can be tricky processes, involving careful decisions about maintaining or surrendering various contractual rights. To ensure that your lease accurately reflects your business needs, consult the New Jersey real estate attorneys at Samuel C. Berger, P.C. We can help you negotiate your next commercial lease to get the terms that best support your business goals. Contact us online or call (201) 587-1500 or (212) 380-8117.

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