How arbitration works in landlord and tenant disputes

When you take out a lease on business premises, it might contain arbitration clauses. This means that if you and the landlord have a dispute, it might be referred to a third party known as an arbitrator. The arbitrator makes a decision called an "award" that you and the landlord must follow.

This keeps certain types of disputes out of the courts and deals with them more informally, but still by a professional who has expertise in relevant matters. It's a legal process that has rules to follow, and an arbitrator's decision can be enforced through the courts.

The most common use of arbitration clauses in leases is for rent reviews, so this blog concentrates on this aspect.

What is arbitration?

Arbitration is a process for resolving disputes. It's used when the lease says it must be used or when the people involved agree to use it.

Arbitration is commonly used in leases for:

• rent reviews

• clauses relating to suspending or reducing rent: these usually apply if a property has suffered accidental damage from fire or water and can't be used for a period of time

• some service charge disputes

If you (the tenant) and the landlord agree, you can also deal with lease renewals by appointing an arbitrator. This is called PACT (Professional Arbitration on Court Terms).

Arbitration procedures

An arbitrator is a person who is qualified to act as an arbitrator by the Chartered Institute of Arbitrators. Professional arbitrators have the letters "CIArb" after their names.

Once appointed, the arbitrator has powers under the Arbitration Act 1996, including the power to:

• set out the procedure for dealing with the dispute (such as when and how the parties put forward their evidence)

• make a decision ("award") in the case – this includes the power to make a decision on who pays the costs of the arbitration

The award is as legally binding on you and your landlord as if it was a court's decision. If you or the landlord refuse to do what the arbitrator has decided in the award (for example, to pay a sum of money), the other party can get a court to enforce the award.

Arbitrations are confidential between the parties and are usually dealt with much more quickly than in court.

Who can be an arbitrator?

People with many different areas of expertise act as arbitrators. In landlord and tenant disputes, the most relevant area of expertise is property, which means a surveyor who's qualified as an arbitrator is usually appointed. The professional body for surveyors is the Royal Institution of Chartered Surveyors (RICS).

How do you appoint an arbitrator?

When a dispute goes to arbitration, the parties must choose (or "appoint") an arbitrator. Your lease should tell you how to do this. Sometimes you and the landlord are free to choose the arbitrator you want, by agreement. Depending on the lease, either you, the landlord or both of you have the right to apply to appoint an arbitrator.

Normally, you appoint the arbitrator by "applying" to a professional body that chooses a qualified arbitrator to act in the dispute. Most leases specify that the arbitrator is someone appointed by the president of the RICS.

In practice, "applying for an appointment" means that one of the parties fills in a form and sends a payment for the fee to the RICS. The president then appoints an arbitrator, who gets in touch with the parties and starts the arbitration process.

Sometimes the lease specifies a different professional body (for example, the Institution of Civil Engineers) to appoint the arbitrator. It depends on what the dispute is about and what the lease says.

What is a rent review and how does the arbitration procedure work?

A rent review is a clause in your lease contract where, after a certain period of time, the landlord can adjust the rent. In most – but not all – leases, this period is every three years, and the adjustment is "upwards only," meaning that the rent increases.

The procedure for reviewing the rent, and the way the rent is decided, is set out in the lease. Rent reviews are about finding a value, so it's better to have an experienced valuer decide rather than a judge, who lacks the same experience as it isn't their job.

Rent review arbitration procedure: Notices

Not all rent review clauses are the same, but most work in a similar fashion. The landlord sends you (the tenant) a written notice proposing a new rent.

If you don't agree, you respond within a set time with a written counter-notice. If you miss the deadline, the new rent is fixed at the rate in the landlord's notice. In that case, there is no arbitration, but you pay the increase in rent by default.

However, if you serve a counter-notice in time, you and the landlord have to see whether you can reach an agreement. If you can't, the rent review is decided by arbitration.

Rent review arbitration procedure: The arbitration itself

The arbitrator in a rent review is normally a surveyor. The arbitrator sets out a timetable for you and the landlord to present your evidence and arguments, usually in writing.

The arbitrator considers both sides' cases and decides what the new rent should be. To decide, they look at the assumptions and disregards in the lease and any comparable evidence.

The lease sets out a formula for how the rent is to be valued – for example, the property is usually valued as if it's in good repair (whether it is or not). This favours the landlord. Other assumptions or disregards may favour you, as tenant – for example, if you've carried out lawful improvements, those are usually disregarded (otherwise, you're paying twice).

An example of comparable evidence is the price for a similar property in the market, which the arbitrator compares to your lease. Either you (or your advisers) or the landlord will be responsible for getting this evidence. Comparable evidence should be:

• comprehensive – it should consider lots of rentals, not just one or two, as similar as possible to the property being valued

• recent, verified arm's-length open market transactions (business deals in which the parties have no prior relationship and act independently)

• consistent with local market practice

Rent review arbitration procedure: The award

Once the arbitrator has considered all the evidence, they make the award. They don't usually release the award until all their fees are paid.

When you and your landlord sign up for arbitration, you become "joint and severally liable" for the arbitrator's fees. This means that if one of you goes bust or fails to pay, the other party has to pay all the fees.

What if I don't like the award?

Unlike in a court, there is no option to appeal the arbitrator's award. There are some limited procedural grounds to challenge an award, but the courts rarely intervene.

What does arbitration cost?

Arbitration can be expensive. An arbitrator's fees can be several hundred pounds per hour, plus VAT. If arbitration goes all the way to an award, it usually costs several thousand pounds or more. You and the landlord will also have your own representatives' costs to pay.

Surveyors and solicitors are not allowed to charge a percentage of the rent increase (or decrease). They're also not allowed to act on any kind of "no win, no fee" agreement in rent review arbitrations.

On the other hand, you have to consider the costs and benefits of arbitration. For example, a rent increase of £20,000 a year over five years is £100,000 (plus the increase in business rates that follow). If you spent £20,000 on fees to prevent the increase, you'd still be £80,000 or more better off over five years if you win the arbitration.

It's highly recommended that you use professional advisers (surveyors and/or solicitors) to represent you in arbitration.

Who pays the costs of the arbitration?

Unless you and the landlord make a deal, the arbitrator decides which one of you pays the costs. Usually, it's the loser who pays the arbitrator's fees and the other party's costs.

If you've made offers to settle the dispute in writing, the arbitrator may take these into account when deciding who pays the costs. However, the arbitrator has the final decision.

What if my landlord refuses to go to arbitration?

If the lease doesn't mention arbitration, you and the landlord can agree to appoint an arbitrator to settle a dispute. But you can't force them to do it. In most cases though, the lease determines who has the power to appoint an arbitrator, when and how.

If the lease allows either party to start the process, but your landlord won't go to arbitration, you simply start the appointment process. In processes that favour you, as the tenant (such as arguing for a rent suspension after fire or water damage), the lease usually gives you that option.

On the other hand, if the lease says that only the landlord has the option to start the process, you won't be able to force them to. In practice, this is unlikely to favour the landlord. If your landlord wants to charge higher rent, for example, they have to start the process. Otherwise, you can simply enjoy the lower rent.

What are the pros and cons of arbitration?

Arbitration has its benefits and downsides, and you must decide whether the process is worth it.

Benefits

• Arbitration is often much quicker than going through the courts.

• Landlords and tenants have some flexibility about who the arbitrator is and what the timetable should be.

• Arbitration should give you an expert decision, rather than a decision made by a judge who is an expert in law rather than property or valuation.

• Arbitration is confidential.

• An arbitrator's award is final, so you should have a legally binding decision quickly.

Downsides

• Arbitration can be expensive, and you may end up having to pay all the arbitrator's fees if your landlord fails to.

• The arbitrator has a lot of leeway, so even if you make good offers to settle on costs, you may not get the benefit.

• It tends to be easier for landlords to get market evidence in rent reviews than tenants.

• If you're unhappy with the decision, there isn't much you can do about it.

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Disclaimer: This information is meant as a starting point only. While we've made all reasonable efforts, we make no warranties that the information is accurate and up-to-date and we won't be responsible for any errors or omissions in the information or any consequences of any errors or omissions. You should seek professional advice where appropriate.