You’ve Got To Know What Words Mean – Was Arbitration Mandatory?

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Arbitration (and other alternate dispute resolution methods) have their place in agreements such as leases. Another possible way to say that, and one that brings out a bit of nuance, is that arbitration is a specialized tool, not a Swiss Army knife.

Even its strongest advocates, those who would like to sidestep litigation entirely, recognize that there are things that courts can do and arbitrators can’t. One prime example is to evict a tenant for non-payment of rent. In most jurisdictions courts do that well and do it quickly. They have a direct relationship with the officials empowered to throw tenants out. Arbitrators would need to get judicial enforcement of what would be the equivalent of a warrant of removal. Courts have a summary disposition procedure for eviction cases. As a practical matter, the arbitration process doesn’t and won’t.

Today, our plan is to begin with a specific example, one brought to our attention by way of a 2013 unpublished court decision (viewable by clicking: HERE) and then to share a few marginally related thoughts (Ruminations-style).

The dispute arose out of a lease with the following arbitration provision:

All disputes under this Lease, OTHER THAN THOSE RELATING TO THE PAYMENT OF RENT OR OTHER CHARGES BY TENANT, must be submitted to arbitration.

So, it seems clear that the parties (or, at least the landlord) believed in arbitration, but understood the wisdom of keeping certain disputes (here, non-payment disputes) in the courts. The exclusion extended beyond matters of “eviction.” The carve-out from mandatory arbitration seemingly was written to cover all monetary disputes. But did it? Is that all Ruminations has to write today? No. Read on.

The tenant “held over” (actually, the lease made the post-term stay into a “double rent “month-to-month tenancy requiring 60 days’ notice to end the tenancy). Then, without giving the notice, and without paying the last month’s “double rent,” the tenant vacated the premises without removing its fixtures and without restoring the leased space.

The landlord asserted that the following charges were owed to it by the departing tenant:

Rent, additional rent, and late charge while still in occupancy, about $29,000.

The same for the months within the 60 day period for which notice should have been given by the tenant, about $58,000.

Repairs and removal of fixtures, about $77,000.

Lease-permitted 10% overhead fee on the $77,000, about $8,000.

Charge for loss of use and occupancy while repairs were performed, about $84,000.

After giving credit for the security deposit it was holding, the landlord claimed that about $224,000 was owed to it as “rent or other charges.” And, it sued for that amount.

What about the mandatory arbitration provision? The (ex-)tenant thought it applied, but the landlord said, “Whoa, disputes over rent and other charges were expressly excluded from that provision.” Neither the lower court nor the appellate court agreed with the landlord.

Apparently, the landlord held a commonly mistaken belief, the one that moneys owed when a tenant breaches a lease, such as future unpaid rent, remain classified as “rent.” It might be acceptable for “street talk” to refer to the rent for what would have been the remainder of a lease term (following the lease’s termination) as “rent,” but it isn’t correct. It would have been, but the lease was over. The landlord’s claim was for money owed because the lease was breached, not for money owed because the tenant still had exclusive possession of the leased space (which is the hallmark of a lease).

Yes, the unpaid rent for the time the tenant was still in the space (one month) was rent, but the rest was not. The lease didn’t expressly call for “rent” during the two- month “notice” period. In this jurisdiction, the landlord had a duty to mitigate. So, by example, had it placed another tenant in the space 15 days after the vacating tenant left, the landlord wouldn’t have been owed “rent” for the rest of the “notice” period.

Ruminations doesn’t intend to explain the way courts interpret contracts (such as leases) when faced with ambiguity because the night is late and we’ve done that many, many times before. For those interested in how this particular appellate court conducted that process, find the “HERE” way above and click there. We will, however, tell readers what the landlord could have done in “its” lease in that regard.

In front of the court, the landlord argued that the cost for doing the repairs and removing the tenant’s fixtures was “additional rent” under the lease. The problem was that the lease denominated a number of (expected) items as “additional rent,” but not the monies the money it would have to spend to cure the tenant’s default. That told the court that some items were and some were not “additional rent.” The lesson to be learned is proper drafting calls for consistency because courts believe, we think rightly, words have consequences. If you denominate some items as “additional rent” and don’t denominate others, then why not be given “credit” for knowing what you meant by distinguishing between the different “charges”?

And, why not say that “all monies payable by Tenant to Landlord by reason of this Lease, other than Basic Rent, are ‘Additional Rent’ and the failure of Tenant to pay Additional Rent will have the same consequence as the failure to pat Basic Rent”?

As to the meaning of “other charges” in the carve-out from arbitration, the court felt that term was ambiguous in the overall context of the lease. On one hand, it could have meant any “monies” owed by reason of the tenancy. On the other hand, as the tenant propounded, it could have meant only the obligations incurred during its period of use and occupancy. Two reasonably conceivable interpretations means: “ambiguity.” Again, words matter.

By the way, the lower court had a “take” on the global meaning of the lease’s mandatory arbitration provision. It ruled that the carve-out’s intent was to allow the landlord to bring a summary dispossess (eviction) in a court, but to require “complex litigation” to be heard by an arbitrator.

Two years ago, Ruminations Ruminated about the usefulness of arbitration. We haven’t changed our mind since then. If interested in seeing that earlier blog posting, click HERE.

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