How to Use 'Baseball Arbitration' to Resolve Renewal Rent Disputes
Make sure your arbitration rules cover all the bases.
Resolving lease disputes via arbitration is much cheaper, faster, and easier than going to court. At least that’s the theory. In reality, standard arbitration can be almost as slow and expensive as the litigation it’s designed to avoid. However, a specialized form of arbitration is much better suited for quick and easy resolution of certain kinds of lease disputes, particularly those involving how much renewal rent a tenant should pay. The method is called “baseball arbitration,” and here’s a leasing strategy for using it to resolve renewal rent disputes with your own tenants.
What Baseball Arbitration Is
As the name suggests, baseball arbitration began as a method of deciding the salary of Major League Baseball players that had outgrown their rookie contracts but lacked the necessary years to qualify as free agents. The way it works: The team and the player both make brief summations of what they believe the player is worth and submit final salary offers for the upcoming season. The arbitrator then decides between the two offers. The decision is binding, and there’s no middle ground.
In a variant called “night baseball arbitration,” the parties keep their final best offers confidential and the arbitrator sets a number based on their presentations. The offers are then revealed and the one that’s closest to the arbitrator’s determination prevails.
Baseball Arbitration Is Ideally Suited for Renewal Rent Disputes
Not all lease disputes lend themselves to resolution via baseball arbitration. The method works best for disagreements that can be expressed as specific money amounts. In the leasing context, baseball arbitration is most commonly used to resolve disputes over renewal rents.
Explanation: Many leases give tenants an option to renew the lease at an agreed-to rental amount. Deciding that amount upon initial execution is risky to both sides since nobody can be sure what the rental market will look like when the term expires. So, rather than listing a specific amount, the parties agree to make renewal rent commensurate with the fair market value of the space at the time the lease comes to an end. Of course, when renewal time rolls around, landlords and tenants often have a very different appraisal of what that fair market value is.
These disputes are well suited for arbitration by a neutral expert with commercial real estate knowledge and experience. But in conventional arbitration, arbitrators tend to split the difference—for example, by setting renewal rent at $45 per square foot when a tenant argues for $30 and the landlord wants $60. Recognizing that the arbitrator is likely to come down somewhere in the middle gives landlords an incentive to bloat their fair market rental assessment while having the precisely opposite impact on tenants.
In addition to being simpler than conventional arbitration, baseball arbitration gives both sides an incentive to submit reasonable and realistic offers. Since the arbitrator picks one or the other, highballing or lowballing increases the risks of losing and being stuck with the other side’s rental rate.
11 POINTS TO PUT IN YOUR LEASE
Even if the parties agree to the concept, simply stating in the lease that baseball arbitration will be utilized won’t do. There must be clear ground rules on how the system will work. A poorly drafted arbitration clause can create confusion and breed new disputes resulting in litigation, the very outcome the clause is designed to prevent.
You can use our Model Lease Clause: Specify Baseball Arbitration Rules in Renewal Rent Clause, below, as a template to create your own baseball arbitration provision. Rather than being freestanding the way many conventional arbitration provisions are, baseball arbitration language works best when it’s integrated into the part of the lease dealing with the issue it’s designed to resolve. And since renewal rent is such a common application of baseball arbitration dispute resolution, that’s the focus of our model clause.
1. Agreement to Set Renewal Rent at Market Value
For context, our model clause begins with a general statement of the parties’ agreement that rent during the renewal term will be market value rent (MVR). In the real world, this provision is often accompanied with detailed language listing the factors to be used to determine MVR [Clause, sec. 1].
2. Landlord’s Initial Determination of Market Value Rent
The rest of the clause basically establishes a process to follow to resolve MVR disputes quickly, fairly, and without litigation and perhaps even without arbitration. The landlord begins the process by giving the tenant what it believes is the MVR for the space. There are two ways this can work:
- Option 1: The tenant can request the landlord’s MVR determination in its written notice of renewal. The lease should require the landlord to provide its MVR determination in writing by a fixed date that’s exactly one month after the deadline for the tenant to exercise the renewal option [Clause, sec. 2(i)]]; or
- Option 2: If the tenant doesn’t request it in the renewal notice, the landlord should provide its written MVR determination at least two months before the lease expiration date [Clause, sec. 2(ii)].
3. Tenant’s Response to Landlord’s Determination
It's now the tenant's turn at bat. Once it receives the landlord’s written determination of MVR, the tenant has a stated number of days (the shorter, the better from the landlord’s perspective) in which to either:
- Say nothing, in which case the landlord’s MVR determination is deemed the “final and binding” renewal rent; or
- Send the landlord written notice objecting to the landlord’s amount and countering with its own determination of what the MVR should be [Clause, sec. 3].
4. The Averaging Resolution
If the tenant’s counterproposal isn’t acceptable, it’s time to initiate the dispute resolution process. Our model lease clause provides for alternative resolution mechanisms depending on how far apart the sides are. If the difference between the landlord and tenant’s MVR determination is narrow, which our clause defines as 8 percent or less per rentable square foot per annum for each year of the renewal term, the MVR is set as an average between the two proposals. Thus, the dispute ends and there’s no need for arbitration [Clause, sec. 4].
5. The Baseball Arbitration Resolution
If the gap in the sides’ respective MVR determination is wider than the stated 8 percent threshold, the dispute goes to baseball arbitration. Specifically, the clause clearly states the parties’ intent to resolve the dispute by baseball arbitration [Clause, sec. 5].
6. Appointment of the Arbitrator
Establish the process and ground rules for baseball arbitration, starting with how the arbitrator will be appointed. Hopefully, the sides can mutually agree on an arbitrator. But you need to be ready in case that doesn’t happen within a specific period of time. Our clause says that if no agreement is reached within 15 days after the landlord receives the tenant’s notice of objection and MVR counteroffer, either side can ask the American Arbitration Association to designate an arbitrator [Clause, sec. 5(a)].
7. Arbitrator’s Credentials
To ensure fair and effective resolution, you need to specify the kind of credentials and qualifications you want the arbitrator to have, which may include:
- Being in a designated profession, like real estate broker or appraiser;
- Having a specific accreditation or certification, like Member Appraisal Institute (MAI) certification; and
- Having a minimum number of years of experience in commercial real estate and perhaps your market or region [Clause, sec. 5(a)].
8. Arbitrator’s Ruling
To keep the process moving quickly, require the arbitrator to make a ruling quickly—say, within 30 days of being designated. Specify that the arbitrator must follow baseball arbitration methods and choose between the landlord and tenant’s MVR determinations. To head off potential legal challenges and litigation, clearly specify that the arbitrator’s determination will be “final and binding” on both sides without need for court review or intervention [Clause, sec. 5(b)].
9. Powers of Arbitrator
All you want the arbitrator to do is pick one of the MVR determinations, not rewrite the lease. So, stipulate that the arbitrator won’t have the power to add to, subtract from, revise, or change any part of the lease [Clause, sec. 5(c)].
10. Allocation of Arbitration Costs
Specify who’s responsible for paying the costs of arbitration. Although some agreements require the loser to pay all or most of the expenses, our clause takes the neutral approach of requiring both landlord and tenant to pay for their own counsel and split the arbitration costs 50/50 regardless of the outcome [Clause, sec. 5(d)].
11. Renewal Rent While Resolution Is Pending
Last but not least, plan for the possibility that the lease will expire before the arbitrator makes a ruling by providing for an interim rent while the case is pending. Our clause requires the tenant to pay the landlord’s proposed MVR but requires the landlord to refund any overpayment if the arbitrator rules in the tenant’s favor [Clause, sec. 6].
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