Is Lease the Final Word on Dispute Resolution Method?

October 23, 2015
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Q: Under my lease for shopping center space, the owner must get my consent before making major changes to the appearance of the center. Recently, the owner announced that it will be updating the center. I believe the changes will affect me, so I don’t think I’m being unreasonable by withholding my consent. But the owner asserts that I’m being unreasonable, and now things are at a standstill. I want to arbitrate the issue, but the owner wants to go to court to settle the matter. Who will prevail?

A: If you have an arbitration provision in your lease, the express terms of the arbitration provision will most likely determine the outcome. That is, do the arbitration provisions say that arbitration is the method of resolving the type of dispute you and the owner are having? If that’s the case, whether you get the arbitration you’re seeking may also depend on whether your consent is unreasonably withheld.

A very similar recent Oklahoma case addressed the issue of when arbitration provisions in a lease come into play when determining whether arbitration trumps a lawsuit to resolve a dispute over changes to a commercial property.

There, the owner of a shopping center allowed a retailer at the center to alter the center’s exterior without the consent of a clothing store tenant, allegedly in violation of the tenant’s lease with the owner. The tenant sued the owner for damages, and asked the trial court to compel arbitration under the terms of the arbitration provision in its lease. The owner then sued the tenant, claiming that arbitration didn’t apply to these circumstances.

The owner pointed out that the lease had a consent provision governing the requirements for the tenant and owner when a situation arose that required the tenant’s consent to changes to the center. The owner claimed that it had consulted the tenant about making the changes and had asked for permission to do so, but the tenant had “unreasonably withheld” its consent to them—in violation of the consent provision. The owner argued that the tenant’s unreasonable withholding of its consent gave the owner the right to go ahead with the changes. And, according to the owner, the arbitration provision in the lease didn’t apply to consent issues, such as this one, and, therefore, the tenant and owner should use the court rather than arbitration to determine the outcome of the dispute.

So, although the allegedly impermissible changes to the center sparked the lawsuit, the real issue was the lease’s arbitration provisions. Specifically, a court had to determine whether the arbitration clause in the lease applied to a situation like this one. In other words, which was proper—a lawsuit or arbitration—when unauthorized changes had been made to the exterior of the center despite a tenant’s objections, if the objections were unreasonable? 

Lease Sets Out Parties’ Remedies

The relief either party in the Oklahoma case could receive under the consent provision in the lease was purely equitable—that is, a court would issue an order compelling one or both of the parties to do or refrain from doing something, rather than awarding monetary damages. And disputes involving equitable remedies were excluded from arbitration by the express terms of the arbitration provision in the lease. Therefore, if the court determined that the tenant didn’t unreasonably withhold its consent to the modification, the tenant’s remedy was a court order compelling the owner to go through arbitration to determine issues pertaining to restoring the exterior’s original appearance. If the tenant had unreasonably withheld its consent, the matter would be determined through litigation.

Tenant Forfeits Right by ‘Unreasonableness’

After a series of appeals by the tenant, an appeals court upheld the trial court’s denial of the tenant’s motion to compel arbitration. It said that the disputed provision provides that the owner would not alter the exterior of the shopping center without the consent of the tenant. The owner admitted that it allowed another tenant to alter the shopping center’s exterior at that tenant’s store location without the tenant’s consent, observed the appeals court. However, the owner maintained that the tenant unreasonably withheld its consent in violation of the consent provision, it noted. The owner contended that the unreasonableness of the tenant’s refusal to consent is demonstrated by the tenant’s conditioning its consent upon the owner making additional exterior alterations that would benefit the tenant, said the appeals court.

The appeals court explained why a lower court’s ruling that the parties’ dispute was subject to arbitration had been incorrect. It noted that the lower court stated that the tenant was alleging breach of contract and was claiming damages in the amount of $50,000—and the arbitration provision expressly applied to claims that were $50,000 or less.

The appeals court acknowledged and agreed with the owner’s argument that the lower court erred in that analysis, because the tenant suffered no damages, let alone damages of $50,000, as a result of the owner: (1) allowing the other tenant to change the shopping center exterior at its store location; and (2) refusing the additional benefits demanded by the tenant as a condition of its consent. The owner asserted that the only remedy the tenant is entitled to receive (if allowing the exterior’s alteration without the tenant’ consent is found to constitute a lease violation) is an equitable remedy to return the shopping center exterior to the status quo. The owner pointed out that disputes involving equitable remedies are expressly excluded from the arbitration provision, the appeals court noted.

Lease Terms Guide Court’s Decision

The appeals court said that “the question of arbitrability” is one for the courts to decide and that courts will enforce arbitration agreements according to “the terms of the parties’ contract” and won’t impose arbitration upon parties that haven’t agreed beforehand to use arbitration. Before ordering arbitration, the court must determine whether the parties agreed to submit a particular dispute to arbitration.

Here, the appeals court agreed with the owner. It explained that the demands that the tenant made as a condition on its consent for another tenant to alter the shopping center exterior involved benefits that were not otherwise provided for in the parties’ contract. The tenant’s demands (to paint exterior accents at the tenant’s store and to add a second panel on the shopping center pylon sign) were nothing more than requests to modify the parties’ lease. The owner was free to reject such modification of the lease.

“The owner’s act of allowing the exterior change without agreeing to such modification created no right on the part of the tenant to recover the value of these improvements as ‘damages,’” the appeals court emphasized. The appeals court pointed out that, “while a party may seek relief in order to receive the agreed benefits created by the contract, such relief is not necessarily monetary damages.” Here, the only right or benefit that the tenant received under the consent provision is for the exterior to remain unchanged until it consents to proposed alterations. However, the tenant forfeits such right or benefit if its consent is unreasonably withheld, said the appeals court.

“The relief by which each party can receive their respective benefit under the consent provision is purely equitable and disputes involving equitable remedies are excluded from arbitration by the express terms of the arbitration provision,” the appeals court concluded. It upheld the denial of the tenant’s request for arbitration and sent the case back to the trial court for further proceedings to determine the actual issue of the tenant’s consent. “If the trial court determines that the tenant did not unreasonably withhold its consent, the tenant’s relief or remedy is an order compelling the owner to restore the exterior’s status quo; if the court determines that the tenant did unreasonably withhold its consent, the owner is entitled to a judgment declaring that as well as a judgment prohibiting the tenant from interfering with the change in the shopping center’s exterior at the other tenant’s store location,” said the appeals court [KWD River City Investments, L.P. v. Ross Dress for Less, Inc., September 2012].