Carefully Define Scope of Arbitration Clause

Carefully Define Scope of Arbitration Clause

Seeking alternative dispute resolution (ADR)—specifically arbitration—as an alternative to litigation can potentially save time and costs for you and the owner of your commercial space, including the greater likelihood of final resolution due to the limited bases upon which a court will review and reverse an arbitration decision.

If you feel that arbitration can be helpful in your case, make sure to negotiate the exact items that will be subject to that dispute resolution method. The arbitration clause may cover all disputes arising from the commercial lease. However, you may want to carve out exceptions to a broad arbitration clause, such as for disputes relating to rent or the amount in dispute. Or you may want to provide for a limited scope of arbitration to address specific areas, typically disputes arising from operating expenses or common area maintenance (CAM) costs.

It's also important to be aware of the landlord’s motivation. Landlords often prefer to resolve such disputes using arbitration because litigation relating to a CAM cost dispute with one tenant can impact other tenants within the property. Disputes about the attribution or allocation of CAM costs, whether in office buildings or retail properties, are best resolved for owners using arbitration—but it has to be done carefully, and the owner should insist on a confidentiality clause that will apply to all parties in the arbitration proceeding. So consult with your attorney to make sure that an arbitration clause on these issues will behoove you.

For a detailed explanation of how to choose arbitrators and the pitfalls to watch out for, see  “Take Three Points into Account When Drafting Arbitration Clause,” available to subscribers here.