The New York Law Journal Alternative Dispute Resolution (ADR) Special Report
With most accepting the vaccines developed by science and with the warmth of summer in full swing, we are emerging from our pandemic cocoons and re-engaging in the normal daily activities that we once took for granted. Emergency measures have been lifted and we are returning to in-person social and business interactions. As we fully re-enter the physical world, we are cognizant of the devastating toll that the pandemic has inflicted, both directly and indirectly. Countless lives have been lost; families devastated; so many dreams, including long-anticipated celebrations and events, interrupted.
During the pandemic, our access to physical spaces outside our own homes was significantly disrupted. For many, work became entirely virtual, shopping was done via the internet, food and meals were ordered and then delivered or picked up, our entertainment was streamed into our homes. Our constricted way of life greatly diminished the use of office buildings, stores, restaurants, movie theaters, galleries, and the many other amenities that were fixed parts of our everyday lives. Now, a walk of a typical city block will bring us past boarded up storefront after boarded up storefront, a sure sign of economic devastation. Despite significant governmental assistance, many businesses closed, either temporarily or permanently.
The Landlord/Tenant Relationship
Landlord/tenant relationships were severely strained, if not ruptured, during the pandemic. Base rent was not paid; percentage rents evaporated as tenant businesses atrophied. In many cases, customary building services and amenities were not provided or needed. Significant and unanticipated renovations to accommodate the new health environment were undertaken, sometimes in haste, by landlords or tenants. Premises were effectively abandoned, left uncleaned and deteriorated. Now that economic activity is burgeoning again, and there are signs of economic revitalization in the air, we must turn to how to best restructure broken or frayed landlord/tenant relationships.
The non-payment of rent gives rise to a breach of lease and cause for court action, typically in a proceeding to recover possession and obtain a monetary judgment. Commercial eviction proceedings can be subject to a legislative stay that is slated to expire August 31, 2021. If applicable stays lapse, landlords can pursue their judicial remedies and obtain a judgment which, in the absence of personal guarantees, may be difficult to collect against commercial tenants who are now out of business. Tenants, in turn, can have claims for expenses incurred that they perceive to be the responsibility of their landlords. While previously desirable tenants wish to remain and re-open, and landlords also have a desire to see the tenant stay and recover, the antagonism that is inherent in vigorously contested litigation makes any attempt at a work-out difficult, resulting in added expenses to the parties. This is where the use of alternative dispute resolution can be helpful.
Issues Between Parties – Post-Pandemic
A business that had been a viable, if not excellent tenant, pre-pandemic, having paid its rent and honored the material provisions of its lease, can through no fault of its own, find itself, post-pandemic, falling behind in rent or breaching other lease terms. Surely, the landlord can elect to seek the eviction of that tenant. The landlord could pursue a judgment, but collection can be difficult, particularly if there are other creditors, perhaps some with priority from perfected security interests. The landlord itself could be under economic pressure, confronting the need to pay its own expenses while the income stream with which to do so has been impaired. Will the landlord find a better, more reliable replacement to occupy the space, particularly in a marketplace where many landlords are or will be competing for fewer prospective tenants? The prudent landlord will want to consider the tenant's on-going viability and bank on the tenant's eventual recovery, perhaps obtaining more security against a later failure. On the other side, a tenant who has been at a particular location for some time may wish to resume operations at that site, though needing some time, and some lease adjustments, to re-float the business. Each side will have an interest in dealing with a known partner and in restructuring the lease, rather than having it enforced to the letter.
The issues that exist between the landlord and tenant go beyond the simple question of rent payment. The tenant may not have been using the premises or using it only to a limited degree. The tenant's use of the premises then could have been impeded or prevented by governmental action. In this case, the landlord's ability to provide services was impacted. Any number of businesses had to restructure their physical spaces, such as restaurants, stores, and offices, to comply with social distancing protocols. Many others had to develop new cleaning and health protocols and install new air filtration systems. Repairs or improvements to the space might still be necessary, the responsibility and expense of which impact the length of the term.
Restructuring Leases Through Mediation
Perhaps both parties need to realign their expectations through a dialogue in the mediation process. Mediation is a voluntary, informal and flexible process designed to assist disputing parties with reaching their own resolution. In the landlord/tenant setting, it is a non-binding settlement conference that can be used to preserve relationships.
Where the landlord and tenant have a common interest in repairing their relationship, a trained and experienced mediator can assist them and their counsel in resolving their claims against each other. The mediator has the flexibility, by meeting with the parties both jointly and separately, to identify the concerns that are important to each party and then help both sides come to a resolution. For example, if there are substantial rent arrears, an enforceable schedule for payment, which does not choke the tenant, could be negotiated. Alternatively, if the tenant needs time to regain profitability, the landlord may be rewarded for forbearance through a favorable percentage rent formula. If there are issues concerning financial responsibility for unanticipated improvements, the parties should be able to allocate between themselves who pays and who gets ownership.
Private mediation offers the ability for the parties to select their own mediator, rather than have their matter assigned to a random, unknown judge in the courthouse. While courts have settlement programs and judges who are excellent at bringing a case to resolution, a privately retained mediator will generally be able to spend as much time as needed with the parties, not having the burden that judges traditionally have managing a large docket of cases.
Availability encompasses both the length of a mediation session as well as the capacity to hold multiple sessions, if needed, in close temporal proximity to each other. Additionally. virtual mediation, including the ability to place each side in its own virtual breakout room, with the mediator shuttling in between, has proven to be effective. In-person sessions may be held as well, using comfortable private settings. In mediation, financial and other sensitive information can be exchanged between the parties without fear that the documents will be accessed through public inspection.
Resolving Disputes Using Arbitration
Arbitration offers the prospect that a binding determination can be promptly rendered without the need to fully navigate the judicial system. It may be that landlord and tenant can resolve most, but not all, issues between themselves. A limited issue arbitration can provide an expeditious decision that the parties can incorporate into the document that embodies the terms that they have come to on their own. The relative informality and high degree of collegiality typically experienced in an arbitration enables the parties to preserve their working relationship, something that is not possible in the high-pressure atmosphere of the courtroom. Agreeing to let a third party resolve one or two contentious issues enables the parties to execute the many other items on which they mutually agree. As an illustration, it may be that the parties agree on the length of term and rental payments but cannot agree upon responsibility for pandemic-related renovations. The parties could allow an arbitrator to decide that question and allow for any reimbursement due to the tenant for past expenses to be used as a rent offset and any reimbursement due to the landlord to be paid as additional rent.
Even where the parties do not agree on much, arbitration will enable them to obtain a cost-effective, expeditious determination of their dispute. Contrary to some long-standing beliefs, discovery can be conducted in aid of an arbitration hearing, with the arbitrator being able to assist the parties in focusing on the material issues and completing it in a timely manner. The parties can then select an experienced arbitrator who has the time to hear their issues as needed. Arbitration has the advantage of providing finality, given the generally limited scope of judicial review. However, if desired, the parties can preserve the prospect of appeal, either through an arbitral appeal panel or by using the procedure allowed by CPLR 4317 to stipulate a named person to hear and determine the case, in which event the resulting determination can be entered, and appealed, as if it had been made by a judge.
As landlords and tenants confront the need to resolve the economic issues created by the COVID-19 pandemic, the parties should consider what is the best forum in which to obtain that resolution. For some, the lease will dictate the selection of the forum, though the parties are always free to agree otherwise. The selection of a forum will depend upon the nature of the dispute and the circumstances of the parties and their counsel. In making the selection, consideration should be given to using mediation, in an effort to avoid or limit litigation, or arbitration, as a proven means to obtain a fair and expeditious resolution.
Reprinted with permission from the August 9, 2021 issue of The New York Law Journal © 2021 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.