The now ubiquitous 80-page commercial lease has a myriad of tenant and landlord rights and obligations which can potentially create conflict; for example, the calculation of operating expenses and rent escalations and determining the adequacy of building services. Major landlords and tenants see the disadvantages of litigating these disputes, and so a mechanism for streamlined resolution would be welcome. Enter, arbitration and mediation.

Commercial leases often involve long-term relationships. It seems almost inevitable that disagreements will arise. In the worst case, the disagreement ends up in litigation which can be time consuming, expensive, uncertain and disruptive. Arbitration and mediation are the cornerstones of alternative dispute resolution (ADR). By providing the parties with more control over the dispute resolution process, ADR can be quicker, less costly, and less disruptive than litigation. That said, in the view of many experienced practitioners, arbitration has morphed into a time-consuming process, often as expensive as litigation and has other shortcomings such as the non-appealability of the arbitrator's decision. Not so mediation which I believe to be a materially better form of ADR.

ADR—A Streamlined Resolution Mechanism

Litigation? Arbitration? Mediation? Each "entrée" on the dispute resolution menu has its place.

Definitions:

Arbitration: a neutral person called an "arbitrator" hears arguments and evidence from each side and then decides the outcome. Arbitration is less formal than a trial and the rules of evidence are often relaxed. In binding arbitration, parties agree to accept the arbitrator's decision as final, and there is generally no right to appeal.

Mediation: a neutral person called a "mediator" helps the parties try to reach a mutually acceptable resolution of the dispute.  The mediator does not decide the case, but helps the parties communicate so they can try to settle the dispute themselves.

Arbitration: Some Pros and Cons

While most practitioners are more familiar with arbitration it is not always the best ADR choice. It is typically shorter and less costly than litigation and the parties have more control over the process; also, it's a private and confidential process which sets no precedents. However, when compared to the benefits of mediation, it's clearly a runner-up.

Mediation: More Pros than Cons

Mediation is essentially negotiation.

With the assistance of a neutral third party (the mediator, the parties seek to negotiate a resolution to their dispute. Mediation provides the parties a chance to sit at a table where each presents its case to the mediator and the other side and then (hopefully) settle the matter on their own terms. The mediator may recommend a solution but cannot impose a settlement on the parties.

Timing: Mediation can take place at any time. The parties can try for an early resolution before all escalates and litigation papers are served. Most often, mediation occurs during the litigation process.

Control the Process (creative solutions of complex issues):

Guided by a mediator selected by the parties, mediation allows the parties to negotiate their own resolution on their own terms. As insightfully concluded by one experienced ADR practitioner: "The parties can 'think outside the box'" and agree on a creative solution. In many ways litigation is "the box" they want to get out of." The ability of a judge to impose a creative solution is very limited. For the most part, in a commercial dispute, a judge (or an arbitrator) can only decide who is right, who is wrong, and then award one party a sum of money or dismiss the claim.

Cost: Compared to litigation, a one-day mediation session (and that typically is all it takes) is relatively inexpensive. Litigation costs can be substantial, whereas mediation typically involves a one-time fee that is split between the parties. For example, a mediation can be accomplished in one-two days with the fee of a mediator running $2,000 and $5,000 per day, a fee which is usually split between the parties. On the other hand, litigation can take years and substantial cost with a result that cannot always be predicted.

Confidentiality: Mediation is confidential, so the parties can speak with complete candor and not be concerned they are expressing a public position which may prove problematical in later proceedings. Also the participation in a mediation is "without prejudice" so neither party is foreclosed from pursuing litigation should the mediation fail.

An Educated Client Is Our Best (ADR) Customer: By acquainting each party with the plusses and minuses of its case, greater clarity is achieved and each side becomes more realistic as to what can be fairly called a reasonable negotiated settlement.

High Success Rate: the parties will likely comply with the settlement agreement: The majority of mediations are successful and the parties are more likely to abide by a settlement they have hammered out together.

Preservation of a Positive Landlord/Tenant Relationship (perhaps most important of all): mediation fosters a collaborative environment, which can help preserve business relationships that might otherwise be damaged by adversarial litigation. Preservation of a viable working relationship is a hallmark of the mediated settlement.

Yes, we must mention:

Failed Mediation: There is no guarantee that mediation will succeed. Where mediation fails, the parties carry on with the litigation process as though no mediation took place. The cost and time attributed to the mediation are lost. As a result, the litigation process is one step longer and one step more expensive.

Q: Is this dispute suitable for mediation?

While most commercial leasing disputes are proper subjects for mediation, some are not. The ADR Suitability Guide, published by the International Institute for Conflict Prevention & Resolution (CPR), outlines three factors parties should consider in deciding the suitability of a case for mediation: the parties' goals for managing the dispute, the suitability of the dispute for a mediation process, and the potential benefits of mediation in relation to the specific dispute being considered.

What LEASING Issues Are Suitable for Mediation?

Almost any dispute that arises under a lease, including:

• rent calculations or review
• tax and common area expenses
• operating covenants
• exclusives/ prohibited uses
• assignment and subletting restrictions (landlord's consent issues)
• alterations to the premises
• repairs, maintenance
• options to renew/expand/ROFOS and
• relocation.

How About Selecting the Right Mediator?

You'll select someone with a good deal of practical experience in the commercial leasing arena, typically a leasing lawyer, commercial agent or property manager, depending on the nature of the dispute with a demonstratable record of successful mediations. Also understand the three basic types, approaches that mediator's take: facilitative, evaluative and transformative.

Some details:

In mediation the parties … not the court system … selects the mediator. Mediators often describe themselves as facilitators—a knowledgeable neutral who can guide the parties to fair resolution. However, some styles of mediation are more "neutral" than others. SO, in making this terribly important selection, the parties and counsel should be aware of three major mediator styles: facilitative (traditional—mediator controls the process, the parties the outcome), evaluative (activist mediator evaluates merits of respective positions; holds caucuses with each party separately and controls both the process and the outcome), and transformative (all important aspects of the mediation –process and outcome—are ultimately left in the hands of the parties).

PS: What's a BATNA? ADR-speak for your Best Alternative to a Negotiated Agreement. All in the mediation are hopeful of a good resolution, but the mediator must remind both sides as to the consequences of a failed mediation—perhaps arbitration or in the worst case scenario yes, back to our old expensive, time-consuming friend, litigation. A party focused on its BATNA is more likely to reach—and stick with –a mediated settlement.

Choose Mediators and Mediation Services

The two leading services are the American Arbitration Association (AAA) and JAMS. Of course the parties are free to agree on a selection of their own often resulting in a more trusting relationship and an improved outcome.

The Mediation Process—A Brief Overview

Initiation: Mediation can be initiated by mutual agreement of the parties or as required by a lease agreement. Some jurisdictions may also mandate mediation before allowing litigation to proceed (We now have a program of presumptive ADR in the NYS court system).

Selection of Mediator: The parties select an experienced mediator preferably one with expertise in commercial leasing disputes. The mediator's role is to facilitate discussions and help the parties find common ground.

Mediation Sessions: During mediation sessions, each party presents their perspective on the dispute. The mediator encourages open communication and helps identify underlying interests and concerns.

Negotiation and Agreement: If a negotiated settlement is reached, it is typically documented in a written settlement agreement, which can be enforceable in court.

Conclusion

What Should the Parties Expect From Mediation?

Challenges and Considerations

While mediation offers many advantages, it is not without challenges. Success depends on the willingness of the parties to compromise and engage in good faith negotiations.

Parting Thoughts: Mediation provides a valuable tool for resolving commercial leasing disputes, offering a cost-effective, timely, and flexible alternative to litigation. By focusing on collaboration and mutual interests, mediation can help parties achieve a resolution that preserves business relationships and meets their needs.

For a good selection of model mediation clauses go to the city bar website (nycba.org) and enter "mediation" in the search bar for sample clauses drafted by the alternative dispute committee.

Jeffrey A. Margolis is the founding principal of The Margolis Law Firm in New York City.