Arbitration and Appraisal: Rent Reset Issues

Abstract

Commercial leases often contain arbitration clauses to address disputes between a landlord and tenant. One of the most common disputes arbitrated centers on the determination of market rent or rent as defined or described in the lease, when the parties are unable to reach agreement through negotiation. Often the arbitration clause in the lease will dictate that an appraiser possessing certain professional qualifications and experience is to be selected and mutually appointed or party-appointed if an arbitral panel is contemplated. A determination of the rent to be fixed by the arbitrator or arbitral panel either during the term of the lease or at the end of the lease pursuant to an option to extend or renew the lease often requires evidence from real estate professionals, which typically include valuators. An appraiser appropriately qualified to act as an arbitrator, coupled with an effective appraisal strategy, should reduce the time required to complete the arbitration, and result in cost savings to both parties. Depending on the jurisdiction in which the property is located, the complexity of the valuation issue(s) or the amount of rent in dispute, it may be appropriate for each party to have its own appraisal report independently reviewed by a qualified appraiser prior to the arbitration. This article explores the decision to arbitrate and some of the issues encountered through the presentation of case studies, the role of an appraiser as an arbitrator, and the expectations of an appraiser acting as an expert witness.