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Arbitration - What You Need To Know When it Comes to Office Space

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I recently went to a continuing education class on negotiating commercial leases. There were a number of interesting ideas that I thought would be good to share on the OfficeFinder blog. I will approach each of them in a different blog post.

The first office space lease clause that I thought would be useful to share is that of the “Arbitration” clause that appears in most leases. The purpose of the arbitration clause is typically to resolve rent disputes without having to go to court. The normal process is that each party selects an arbitrator and then those arbitrators choose a third arbitrator. One of the concerns that both the landlord and office tenant have in arbitration is that the arbitrators will very simply split the difference, satisfying no one. One way around this is the use of the baseball method of arbitration. Each party chooses what they believe to be the market rate and then the arbitrators must choose the rate that is closest to what they believe is the market rate. What this does is make both parties take a much closer look at the reality of what they are asking for.

One of the arbitration descriptions I have seen in many office lease clauses is to use the rules of the American Arbitration Association (AAA). While none of my clients have ever had to make use of an arbitration clause, I have been cautioned, as an office tenant representative, to avoid this type of language. From what I've heard the AAA arbitrators are typically attorneys who represent developers or landlords. While this does not mean they can do a good job I would be concerned about their predisposition to possibly lean towards the landlord’s or developer’s point of view.

In order to assure that an arbitration clause will be as effective as possible the arbitration lease clause should specify the qualifications required for the arbitrators and how long the arbitrators will have to make their decision. It should also define the geographic area where comparable buildings are located and described comparable buildings and comparable space in the clause itself.

Of course, the best way to make sure the arbitration clause you are using is going to be effective is to engage a real estate attorney who is intimately familiar with office leases.

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By: James Osgood

Office Leasing Tips , Office Space Negotiations

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