Commercial Real Estate Arbitration

Kevin12649

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Oct 13, 2017
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#1
Hello,

I'm curious if anyone has been through the arbitration process for a commercial property? Or a similar process, that may be a cheaper option, as my understanding is that arbitration can be quite expensive.

I own a business, and the landlord, (ironic, right? cause this is REIN and normally I prefer to be the landlord), anyways, the landlord is trying to push us up quite high for our next lease renewal term. We have been digging into the arbitration process, as the property manager says the landlord is unwilling to move, and we are quite far apart. Not sure if it's a negotiating tactic at this point or if it's genuine, but thought we'd gather some information and prepare ourselves either way.

Thanks,

Kevin
 

Martin1968

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Jan 22, 2017
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#2
There is no easy short answer to your question. Just curious, does your current lease have an option to renew for another term?

There could be several reasons for your landlord to want more, maybe you have had a preffered rate during your first term and he now wants to bring it up to market rent. Maybe lots of demand in a strong economic market. Maybe he wants you out except if you agree to crazy rent?
So many things that could be at stake.

However, if you have an option to renew, there are some things you can do if you feel the asking is out of whack. You already mentioned arbitration and that's not unusual in order to determine a reasonable asking price for rent per sq ft for commercial space based on comparisons of similar commercial space in same building, location or surroundings.
If you want to go that route I would pay a visit to a lawyer that specializes in commercial leasing. Spending 5-10K on lawyers cost can posibbly save you in excess of 10s of thousands $ a year in lease price. (Don't let it come to court case. )

You can also do a lot yourself in regards to negotiating. You can ask around and see what others (preferably some new lessee's) pay for similar sq ft in same location. That will give you a good idea what you can negotiate for price and then you can ask yourself if you feel comfortable with it.

But if you don't feel comfortable then I would recommend a pro.
 

ThomasBeyer

Senior Forum Member
REIN Member
#3
If the commercial lease allows for any arbitrary increase, or your lease is up, then there is no arbitration process. It is called the free market and only negotiation matters. Be informed what other locations charge and be prepared to move to get the best rate.
 
Last edited:

Martin1968

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Jan 22, 2017
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#4
If the commercial lease allows for any arbitrary increase, or your lease is up, then there is no arbitration process. It is called the free market and only negotiation matters. Be informed what other locations charge and be prepared to move to get the best rate.


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It could very well come down to that.

Commercial leases are a labyrinth, and when leasing from the larger corporations you can be asssured they have their butts covered. Spending $ on drafting up a lease (one sided in favour of themselves) by their (specialized) lawyers is peanuts for them.

If I'm correct tho, if there is an option to renew, so let's say 5 yr lease + option for another 5 yr, you might have a case if the landlord unreasonably tries to get well above market rent. $1-3 dollars extra compared to what you paid previously will likely not be unreasonable.

I'm no lawyer, but through my personal experience have seen many complicated cases in commercial leases. You would really need a professional to help you out to determine you have a case. It's start with reading your current lease. And then you would need that professional's help moving forward. Other then that, it will be like Thomas said.
 

Kevin12649

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Oct 13, 2017
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#5
Thanks for the reply. Yes we have renewal terms of 5 years in place already, and are hoping to add another term. And I already know what the landlord doesn't like. We have a patio space that is for our exclusive use. We have utilized it much more than previous tenants did, and he doesn't like that. Feels we should be paying more as a result. But part of the lease says that the only thing negotiable, is in fact the rate per square foot, (the patio space is mentioned in the lease, but it isn't something we get charged for except as an add on to our main leased space). So the landlord is offering a higher rate than anyone in the area pays, and it's quite an unreasonable jump. I don't really see it as a situation that can avoid arbitration, so I've been doing some digging as a result.

And yes, I think a lawyer is probably our best bet at this point. And we know what others are paying, but I think we need to ask them to put it in writing in case this goes to arbitration as I don't see local lease rates being something that an arbitrator will dig up to help us out. We have to present them with the info on which they base their decision.

There is no easy short answer to your question. Just curious, does your current lease have an option to renew for another term?

There could be several reasons for your landlord to want more, maybe you have had a preffered rate during your first term and he now wants to bring it up to market rent. Maybe lots of demand in a strong economic market. Maybe he wants you out except if you agree to crazy rent?
So many things that could be at stake.

However, if you have an option to renew, there are some things you can do if you feel the asking is out of whack. You already mentioned arbitration and that's not unusual in order to determine a reasonable asking price for rent per sq ft for commercial space based on comparisons of similar commercial space in same building, location or surroundings.
If you want to go that route I would pay a visit to a lawyer that specializes in commercial leasing. Spending 5-10K on lawyers cost can posibbly save you in excess of 10s of thousands $ a year in lease price. (Don't let it come to court case. )

You can also do a lot yourself in regards to negotiating. You can ask around and see what others (preferably some new lessee's) pay for similar sq ft in same location. That will give you a good idea what you can negotiate for price and then you can ask yourself if you feel comfortable with it.

But if you don't feel comfortable then I would recommend a pro.
 

Kevin12649

New Forum Member
REIN Member
Oct 13, 2017
3
0
1
#6
If the commercial lease allows for any arbitrary increase, or your lease is up, then there is no arbitration process. It is called the free market and only negotiation matters. Be informed what other locations charge and be prepared to move to get the best rate.

Thank you for the reply. It allows for not unreasonable increases, as based on the market. Making us the highest lease rate in the area would seem to me to be an unreasonable increase...
 

ThomasBeyer

Senior Forum Member
REIN Member
#7
What does the clause SPECIFICALLY state about the patio space ?

What does the landlord care whether you use it a lot or not ?

Are you allowed to use it, or not ?

What does this mean "Yes we have renewal terms of 5 years in place already," .. you have a lease in place .. or not ? Or it is not signed by both parties ?

What are your moving costs ? What are your alternatives ?

If you move, how long would it take him to re-rent, at what rate ?

The best lease negotiation is always a threat to move out, grounded in reality.

I assume this is a restaurant ? It is a common trick landlords use to squeeze more rent out as moving a restaurant is usually prohibitively expensive ($100,000+), forcing many restaurateurs into bankruptcy.
 

Martin1968

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Registered
Jan 22, 2017
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#8
What does the clause SPECIFICALLY state about the patio space ?

What does the landlord care whether you use it a lot or not ?

Are you allowed to use it, or not ?

What does this mean "Yes we have renewal terms of 5 years in place already," .. you have a lease in place .. or not ? Or it is not signed by both parties ?

What are your moving costs ? What are your alternatives ?

If you move, how long would it take him to re-rent, at what rate ?

The best lease negotiation is always a threat to move out, grounded in reality.

I assume this is a restaurant ? It is a common trick landlords use to squeeze more rent out as moving a restaurant is usually prohibitively expensive ($100,000+), forcing many restaurateurs into bankruptcy.
A renewal clause means that you have a pre agreement to extend the lease for another term. It means that all terms in the original lease will basically be guaranteed. With the exception of your rent (per sq ft) as the landlord does have the right to increase to charge market rent. As a tenant you would have a good case if new rent proposed is out of line with market conditions.

As such, and based on the above, if use of the patio space is not specifically mentioned in the original lease, but landlord has allowed it over the 5 yrs past (without any official notification of use of that space not being allowed) you would have a strong case to continue to use that space if them/you would make it an issue. Again, IMO it’s always better to work out the difference and enter a specific clause in the lease when you renew that you can both agree on.

A threat to move out? I’m not sure how realistic this is for you but I would be very careful. As stated before when dealing with the large cooperations, owned by large investors/investment firms and managed by property management companies, they can’t care less. When owned by smaller individual owners/small group of private investors you might have a little luck with threats.