Lease Renewal – A Better Way

It's time to renew your lease. Did you know that in many cases there are inexpensive and mutually satisfactory alternatives to the usual long, drawn out arbitration process? Read on.

As a veteran of three decades of arbitration, I've seen what was supposed to be a simple, inexpensive and convenient method of renewing a lease become a drawn out, expensive and complex procedure.  It needn't be. There are many ways to save money and time on a lease renewal that don't involve formal arbitration. Over the years, I have worked with major banks and trust companies when their leases were due and we were able to resolve the issues without sizable fees.

 
In this article, I will focus on simple arbitration, as when you (the tenant) and your landlord want to work out a fair and equitable rental for the next period. It will detail some solutions to avoiding costly and time consuming arbitration, because make no mistake, arbitration costs can be horrific. For a simple arbitration when all procedures are followed you might pay $15,000 but it's not unheard of for simple retail space renewals to cost $30,000 or more.
 
With the demise of work in real estate and other areas and more law school graduates entering the profession each year, lawyers must look at every avenue for new sources of business. They seem to have found it in arbitration.
 
An arbitration was supposed to be an alternate and less costly method than going to court, but these days lawyers are acting as if an arbitration is just another court case. The result? An issue that could be dealt with in one day or less is now being stretched into an entire week.
 
This doesn't have to be the case; There are alternatives. In fact your lease renewal could cost as low as $3,000 split between you and your landlord. The question is: How do you make this work for you?
 
First, insist that all parties agree to the gross (or net) rentable area.  Most leases do not spell out the size and even those that do can be biased towards the landlord. The solution is to measure the space so you and your landlord are both on the same page.
 
You both should agree to use one professional and split the cost.  Land surveyors aren't your only option. There are companies that provide certified measurements. The cost for measuring a basic store could be as little as $350 to $500.
 
Determine exactly the rules of measurement.  There are standards.  Agree and get this issue resolved. A small variance of, say, 100 square feet at $25 per square foot for five years is extra rent of $12,500. Even if your space is newer and the landlord is a major player, it pays to have your space measured.
 
Now to get to the next stage.  Most leases have an arbitration clause stating that if the landlord and tenant cannot agree, an arbitration is to proceed. Many of these clauses were drafted during the boom years of the 1980's and in many of the cases I have reviewed, the arbitration details are lacking. Therefore you and your landlord have a degree of flexibility in establishing the rules of engagement.
 
Here are my tips on keeping the costs as low as possible, providing you and your landlord share a common goal: to solve the issue in the fastest time and at the lowest cost.
 
1)Decide to share all costs down the middle and hire mutual and independent professionals.
 
2)Use only one arbitrator.  If a clause in your lease states that each side should have their own arbitrator, as well as appointing a third, you and your landlord can amend it by mutual consent.  Figure that professional arbitrators charge from $2,000 per day with more senior arbitrators charging much more. You can shave thousands off of your hearing costs.
 
3)You provide one list of three potential arbitrators to the landlord and he three to you. If one name is similar on both lists, go with that person.
 
4)Only chose an arbitrator who is knowledgeable about real estate.  Ask for references and check them carefully.
 
5)You and your landlord should sign a simple letter stating that you both desire to keep the costs moderate.
 
6)Have the arbitrator sign a declaration of acknowledgment that he is working for both sides.
 
7)Have the arbitrator hire an appraiser to determine the market rent. The one appraiser serves both parties.
 
8)Have the arbitrator make a simple written judgment within an allocated time period.
 
9)For those who want to save even more, there is another option.  Hire one appraiser to serve both sides.  The rental study that the appraiser produces is to be accepted by landlord and tenant.  This eliminates the arbitrator. Again, check the qualifications of the appraiser. Only a limited number of appraisers have worked within the arbitration or legal process.
 
 
The last item is one that I am finding more common today, as everyone tries to avoid high costs with rental renewal.  Over the past decade, I have been retained by both parties on numerous occasions.  The difficulty here is to avoid talking to one party more than to another. 
 
 
I have one strict rule – when I inspect the property, both landlord and tenant must be present and if either party wants to telephone me, then we have to set up a conference call.  The appraiser must be neutral (and be seen to be neutral) at all times.
 
For typical retail space, hiring one appraiser can cost $3,000 to about $5,000, but split between you, there is no more cost-effective method of professional arbitration on the market.  The lawyer's role in all of these simple procedures is to draft the renewal of lease after you and your landlord have come to terms.
 
I am not saying that all arbitrations or renewals are simple.  The purpose of this article is to show that simple renewals should stay simple.  If you have a complex space, unique in its nature, then a formal hearing may be your only alternative.  Make sure that your lawyer knows the arbitration process.  Throughout Canada there are lawyers who are well known for their arbitration skills.
 
Of course, there is one issue that cannot be overlooked.  Arbitration hearings and courts are full of foolish people who want justice and their day in court.  Tenants and landlords don't have to get along.  Some truly don't like each other and cannot communicate except through a third party.  In that case, I have another inexpensive alternative – mediation or negotiation.  This will be a topic of a future article.
 
Remember the money you save in keeping your renewal simple is money you do not have to earn.

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