CRE c Nebraska

Mediation: The better way to solve commercial real estate disputes

The author, a top real estate lawyer in Nebraska, preaches the power of mediation as a better way to resolve the conflicts in which commercial real estate firms often find themselves.

Guest Column by Jerry Slusky, partner with Omaha-based law firm Smith, Gardner, Slusky, Lazer, Pohren & Rogers

Editor’s note: An earlier version of this column was originally published for The ACREL Papers.

“The entire legal profession, lawyers, judges, and law professors, has become so mesmerized with the stimulation of the courtroom contest, that we tend to forget that we ought to be healers of conflict. . . Reliance on the adversarial process as the principal means of resolving conflicts is a mistake that must be corrected. . . For some disputes, trials will be the only means, but for many claims, trial by adversarial contest must in time go the way of the ancient trial by battle and blood. The existing judicial system is too costly, too painful, too destructive, too inefficient for a truly civilized people."  -- Chief Justice Warren Burger, Annual Report on the State of the Judiciary, 1983

Mediation is one such alternative to resolving conflicts without relying on the adversarial process or subjecting the parties to the problems of litigation.  The use of mediation, as well as arbitration, has been promoted by community and business groups, interdisciplinary organizations and practitioner associations.   Mediation is a voluntary process for resolving disputes, which typically produces more acceptable outcomes for the parties in dispute, in less time and for a lesser expense than often occurs in litigation.  Mediation can be requested by any party to a dispute. 

In an effort to resolve cases that would otherwise occupy our nation’s court dockets, both federal and state courts have increasingly begun encouraging both arbitration and mediation. 

The mediation process

Mediation is a guided negotiation.  In mediation, a trained professional mediator, someone completely unassociated with the dispute and with no vested interest in the outcome, assists the parties in first identifying the sources of their conflict and then focusing on the issues of real importance to them.  The mediator then guides the parties through multiple possible solutions in an effort to reach an agreement, compromise or reconciliation.  If the parties are unable to reach a resolution or are dissatisfied with the mediation process, the parties may continue to pursue their individual legal remedies.  However, if the parties do reach a resolution and adopt a mediated agreement, the mediated agreement can be binding. 

Mediation is a process, and there are a number of variations on that process.  However, each variation or mediation model attempts to determine the interests of the parties and then develop creative solutions that satisfy those interests.  One variation is the nine-stage model discussed below, which consists of the seven stages of the formal mediation and two steps often taken prior to the mediation.  Each stage is important to a successful resolution.

1. Pre-mediation Case Development

It is important for the mediator to work with the parties and their counsel to introduce and frame the mediation process.  The mediator will provide an overview of the mediation process, an explanation of the time the process will take (including preparation by the parties, review of submitted materials by the mediator and the formal mediation) and the need for all essential participants to be present for the mediation.  Also, the mediator prepares the parties for the possibility that, if an agreement is reached during the mediation, it will be necessary to draft a final resolution to be signed by both parties and their counsel.

2. The Position Statement and Mediation Agreement

Prior to the formal mediation, and sometimes as a part of pre-mediation case development, the parties will provide the mediator with a Position (or Issue) Statement and execute a Mediation Agreement.  The Position Statement should set out the factual and legal positions of the parties.

Mediation Agreements should be drafted to suit the specific circumstances of each case, identifying and addressing such issues as: the actual matters in dispute, the parties' desire to settle disputed matters through good faith negotiation, the timetable for the mediation, pre-mediation disclosure, confidentiality, the participants, the allocation of costs, the settlement authority of the parties, the enforceability of a settlement agreement and the circumstances for termination of the mediation.

3. The Opening Statement or “Setting the Table”

During this stage, the mediator arranges the physical surroundings at the mediation in order to make the parties more relaxed.  The mediator then introduces himself or herself, the parties and their counsel (if present). The mediator again explains the mediation process and the individual mediator’s approach to that process.  This is also the mediator’s opportunity to outline the various stages of the formal mediation, including the mediator’s role as an impartial and neutral facilitator.  During this stage, the mediator should remind the parties that they must communicate with each other, as they, not the mediator, will resolve their dispute.  The mediator will also explain the confidential nature of the process and set the ground rules. 

4. The Position Statements

After the opening statement, each of the parties is given the opportunity to “tell their story,” or explain their perspective on the actions or events leading up to and creating the dispute, without interruption by the other parties.  Although the parties may have submitted a written Position Statement during pre-mediation case development, this is an opportunity for the parties to speak freely about their positions.  This can be cathartic, since it allows the party speaking to express concerns, vent frustrations and release stress.  This also gives the mediator the first opportunity to evaluate the parties’ true interests.

5. Determining the Parties’ Interests 

Once the mediator has heard the parties’ stories, in their own words, the mediator will ask questions of the parties, in order to clarify the issues and identify their underlying interests. The mediator continues to investigate the underlying and often unspoken issues by asking pertinent questions. During this stage, the parties are often separated and individual caucuses are conducted. The mediator will then try to list the areas of agreement and dispute, but focus on the parties’ joint interests.  Up to this point in the dispute, the parties have usually focused on their differences, not their shared goals and interests. 

6. Determining the Parties’ Issues    Once the mediator has identified the parties’ interests, the mediator will attempt to identify the issues to be resolved during the mediation.  Often the mediator will suggest issues, or draft neutral problem-solving statements, and ask whether the parties agree or disagree.  These statements are generally phrased as open-ended, such as “how to deal with…” or “what could be done about…”, and are not able to be answered with a “yes” or “no.”  The issue is framed in terms that satisfy the parties’ interests.    7. Formation of Alternatives or Brainstorming Options

Once the parties have agreed upon a problem-solving or issue statement, the parties need to suggest or “brainstorm” options that may satisfy their interests or solve their problem.  The mediator will remind the parties of the ground rules (parties should not commit to or criticize any one option).  During this stage the parties are encouraged to be creative and even outrageous when suggesting options.  The mediator may also offer suggestions as to available options that had not been previously considered.  By suggesting unusual, creative or previously unconsidered options, the parties will often arrive at an ingenious resolution specifically tailored to their specific situation.

8. The Resolution

Once the parties have identified their options, they can evaluate the individual merit, practicability and feasibility of each option or the combination of options. During this stage, the mediator often focuses the parties on objective criteria or benchmarks, tests realities, and assists them in selecting a viable option. The mediator will not automatically eliminate an option simply because a party criticizes it, but uses the criticism as an opportunity to explore the reasons for the objection, and possibly identify previously unexposed issues.  If necessary, the mediator may again conduct a private caucus with the party to discuss whether the relevant option, although not ideal, may be better than possible alternatives.  Once the parties commit to an option, or combination of options, easy issues are usually quickly resolved. The parties will then negotiate the more challenging terms of the settlement until all the issues have been resolved.

9. Closing

The final stage in the mediation process is the formalization of an agreement between the parties. The parties or their attorneys will memorialize the agreed upon terms of settlement in writing. If a Mediation Agreement was executed, the resolution will often address each issue listed in the Mediation Agreement, item-by-item.  The final Agreement is then signed by all parties and their counsel.  If the parties do not reach agreement, the mediator can assist the parties in determining any issue in which there was agreement, and help the parties establish a course of action to resolve the outstanding issues.

When is it appropriate?

Mediation is not appropriate for every dispute or conflict.  Mediation has been successful in numerous types of cases, including personal injury actions, contract disputes, employment and labor relations, family law and real estate.  Whether mediation is appropriate depends on several case-specific factors.  Those cases with a likelihood of fair and reasonable settlement, or where the parties have specific interests that may be further damaged by the time and expense of litigation are ideal candidates for mediation.  Some cases are better suited for litigation, depending on the personality or desires of the client or the facts of the case.

Mediation has been successful in commercial real estate disputes for several reasons.  Due to the nature of the real estate market, land or rental space may not have the same value at the end of litigation as it did when the dispute arose.  The value of the parties’ interest may be damaged by injunctions, restraining orders or other restrictions imposed by the courts.  Depending on the characteristics of the deal, the nature of the real estate and the uses of the property, a variety of disputes can arise from a commercial property lease transaction.   The common sources of commercial property lease disputes are those issues often contested in commercial real estate transactions and the differing interpretations of lease provisions by the landlord or tenant.  These generally include:

• rent calculations or review, • annual allocation of property tax and common area expenses, • enforcement of operating covenants, • assignment and subletting restrictions, • landlord consent (usually required not to be withheld unreasonably in relation to assignment or subleasing or quality of proposed tenant alterations), • improvements, changes or alterations to the premises, • expansion or reduction of leased premises, • relocation rights, • options to purchase or rights of first refusal and first opportunity, • adequacy of maintenance, • responsibility for repairs, • exclusive use rights or prohibited uses, and • permissible commercial activities or use restrictions (such a claim may involve a third party who is also a tenant).

Outside of the lease disputes noted above, problems can emerge in other areas, including eviction rights and procedures, identifying the premises, establishing commencement and expiration dates and clarifying conditions surrounding the delivery of commercial space.

Benefits of mediation

Mediation advances interests rather than decides rights, and requires willingness to compromise by the parties.  A mediator’s assistance in a particular dispute may be the catalyst to bring the parties to reconsider the lease in light of their experience with it. In addition, resolving lease disputes efficiently is often vital to third parties including lenders, appraisers, REITs, and other investors.

1. Less Time and Expense than Litigation

Judge Learned Hand said many years ago, “As a litigant, I should dread a lawsuit above all else, other than sickness and death.”  Mediation has the potential to save the parties time and money, especially considering that commercial real estate mediations can often be completed in a single day at a fraction of the cost of litigation.  If “justice delayed is justice denied,” then it is better to speed up justice rather than bearing the financial burden of waiting to recover damages, or restitution as a result of self-help remedies taken by landlords or tenants.   Until dilatory courts can afford to dispense justice more quickly, the best compromise solution may be to bypass them by means of mediation. 

The actual cost of mediation depends on the mediator selected. In a typical real estate mediation, a commercial mediator charges from $150 to $500 per hour, similar to the hourly rates charged by attorneys. A real estate mediation usually lasts three to four hours, but, depending on the complexity of the issues, may well take up to a full day (six or eight hours).  Generally, the cost for the mediation and the manner in which that cost is apportioned among the parties is set out in the Mediation Agreement.  Although mediation is not inexpensive, when litigation can cost each party $25,000 to $75,000 or even more, mediation is well worth considering.

2. Creative Solutions of Complex Issues

Commercial property transactions often involve complex documents with detailed covenants, restrictions, and controls that are specific to the real estate industry. While judges are capable generalists who can learn about a case in a short period of time, there are significant advantages to having disputes resolved by a neutral mediator with specific knowledge of the issues involved and experience negotiating commercial real estate transactions.  In evaluating disputes regarding a commercial property lease, “the mediator should consider what is important to a commercial tenant, property owner, property manager, or landlord concerning the cost of acquiring or leasing the space and can identify issues regarding a proposed use or occupancy.”

Using a mediator who is also an experienced real estate professional offers the potential for the parties to reach a creative solution, not contemplated by the contract or lease, benefiting all parties. The solution may simply start with the dispute and look to the relationship more generally.  It may consider a variety of options, such as: lengthening or shortening the term of the lease, changing the location or amount of space leased, reconfiguring space, establishing a formula to avoid disputes in future rent reviews, assignment of the lease or subleasing, tenant inducements, or tenant improvements.  Such creative solutions are generally not possible or available in the litigation process.

3. Parties Control the Resolution

Mediation is a favored dispute resolution technique because the parties control the outcome.  The parties are active participants in the process and are responsible for the agreed upon resolution.  This is unlike litigation, where the parties may feel their individual wishes and desires are ignored.  When the parties are instrumental in creating the resolution, they are generally more apt to abide by it.

4. Confidentiality

Another benefit of mediation is that the proceedings are confidential and the outcome is generally not considered public information.  Real estate professionals, developers, contractors, and inspectors place a substantial value on both their time and their reputation.  Their future income and success are directly related to both and it is generally not in their best interest to wage a lengthy public litigation if it can be resolved quickly and confidentially.

Confidentiality is also essential to open communication amongst the parties and with the mediator. The fact that the parties are pursuing mediation usually reflects a level of trust and recognition that the adversary is a responsible party who will act fairly and in good faith during the mediation.  Parties who might not be comfortable speaking at trail regarding sensitive issues are more inclined to speak during a confidential mediation.  Also, the confidential nature of the process gives parties who might not be allowed to speak freely at trial the opportunity to relate their version of the dispute in their own words.

5. Client Education

 Mediation also offers the party an invaluable opportunity to understand the strengths and weaknesses of their case.  It forces the party to hear and consider the analysis and perspective of an objective third-party.  This may force the party to acknowledge hidden weaknesses and be more realistic regarding a possible resolution.

6. Greater Adherence to Final Resolution

Further, mediation gives the parties the opportunity to control the final resolution of their dispute. Rather than having an outsider, such as a judge, jury or arbitrator, resolve their dispute for them, the parties do it themselves. Gains and losses incurred pursuant to a mediated agreement are more predictable for the parties and the likelihood of satisfaction with the outcome is greatly increased. Mediated agreements tend to hold up over time because the resolution was not imposed upon the parties, but rather crafted by the parties and, therefore, the parties are generally more satisfied with the outcome.

7. Preservation of Relationship

Many commercial real estate experts cite the preservation of business relationships as a major advantage to resolving disputes through mediation rather than lawsuits. Compared to litigation, the nature of mediation is less confrontational, less likely to trigger issues of pride and ego, and more conducive to enabling the parties to work together.

Jerry Slusky serves as mediator on a wide array of commercial real estate disputes throughout the Midwest, including landlord/tenant, partnerships, lender/borrower, banking, zoning and estate matters.  He has been able to assist in resolving more than $100 million of disputes in the last three years.  He can be reached at  JSlusky@SluskyMediation.com.