It’s time for some post-pandemic and post-Brexit thinking on property disputes, write Nick Wood, Gabrielle Theunissen-Blackshaw and Sally Tang.
In a 2014 article for The In-House Lawyer, Guy Fetherstonhaugh QC and Caroline Shea referenced a quote by Lord Neuberger, who addressing Arbrix (the representative body of rent review surveyor arbitrators), said: “There appear to me to be a number of reasons why people prefer arbitration… two of them are privacy and expert tribunal. Expertise may be a very important matter in property disputes, as many disputes involve technical issues… I well recall trying to explain ITZA to a circuit judge… whose closest experience of retail property was paying his wife’s Peter Jones bills.”
Leaving aside the clear benefits of arbitration where there are international parties involved (namely, among others, neutrality, recognition and global enforcement of awards), domestically many property disputes crave an efficient and effective resolution process with a decision-maker experienced in the sector.
Many typical real estate disputes do not require especially heavy case management or lengthy trials, or have multiple interim issues to be resolved; getting to a well-reasoned decision in a focused, fast manner without risk of multiple appeals is highly attractive.
Arbitration has worked well in the rent review arena for years, and it is now time to make the case again for arbitration in our sector. Looking at the statistics of many of the major arbitral institutions, the real estate world (with the notable exception of the construction industry) ostensibly has not yet made the most of what arbitration can offer.
As we emerge from the pandemic and leave the EU, there is no better time to reconsider arbitration as a powerful alternative for resolving a variety of real estate disputes, including guarantee claims, break option disputes, applications for consent, dilapidations, service charge issues and other property-related contractual issues.
We foresee arbitration becoming an increasingly relevant mechanism to solve all manner of property disputes, and real estate operators will do well to consider where arbitration might be selected as one of the contractual methods, or indeed the only method, of dispute resolution. The hotels sector appears to be one area where there is seemingly a wider use of arbitration already.
From procedure to remedies and enforcement (and international recognition of awards), arbitration has a strong hand to play.
The agility, flexibility and adaptability of arbitral institutions has been particularly showcased during the pandemic through, for example, increased use of technology and the modernisation of process and procedure, albeit the courts have also risen to this challenge.
We consider below some of the advantages and drawbacks of arbitration, and then take a typical break option dispute and compare and contrast the hypothetical resolution of that dispute through the courts as against an arbitration.
Advantages of arbitration
Neutrality: arbitration is often seen as a neutral forum and is widely understood by the international real estate market. Where one (or more) of the parties is international, this can provide reassurance that no party will have “home advantage”.
Parties can agree a neutral “seat” of arbitration (where the arbitration will be heard), the governing law and whether any specific arbitral rules are to be followed (for instance selecting the London Court of International Arbitration or the International Chamber of Commerce).
Choice of arbitrator(s): a fundamental advantage of arbitration in property disputes is being able to appoint an arbitrator (whether an individual arbitrator or a panel of, say, three arbitrators), who will be selected by virtue of their specialist knowledge.
Confidentiality: one of the general principles of arbitration is that the award and all materials or documents produced in the arbitration are confidential (although an award could be subject to disclosure in limited circumstances). This is in stark contrast to the court process, which is, generally, public and can risk adverse publicity and reputational issues.
Procedure: there is significant flexibility for parties to adapt the rules, process and timetable of an arbitration, and the Arbitration Act 1996 is seen as broadly effective domestic legislation.
The parties can generally decide the extent of disclosure, witness evidence and oral evidence to avoid a disproportionate process that may be costly and time-consuming. Conversely, court litigation requires strict adherence to procedural rules. The rigidness of some of these procedures and the requirement to comply can increase costs exposure for both parties significantly. Litigators are no doubt anxiously getting to grips with the new CPR provisions for trial witness statements, and it is anticipated that, while intended to reduce costs exposure, the new rules may well increase costs, complexity and process (at least while the new regime beds in).
Recognition of awards: where needed, an award obtained in England will be generally enforceable globally under the New York Convention.
Appeal: the arbitration process from start to finish can be completed quickly and with relative finality; the parties can resolve their dispute and move on given the limited grounds for an appeal.
Drawbacks
Self-evidently, not all property disputes will be suitable for arbitration. The Arbitration Act 1996 provides that an arbitrator does not (generally) have power to order specific performance in respect of contracts relating to land, so such disputes may not ultimately be suitable for arbitration. However, the parties can agree to give the arbitrator(s) such power. Accordingly, ensuring that the arbitration referral provisions are drafted appropriately is key.
In both litigation and arbitration there will, of course, be legal fees on both sides. The costs of arbitration may end up being greater than court litigation, as parties will be required to pay arbitrator’s fees and to pay for a venue for the arbitration. This could result in higher overall costs, given there are no equivalent charges in litigation (other than fixed court fees).
However, in reality, it is the lawyers’ fees on both sides that are so frequently the major item of cost. In many cases where arbitration offers an overall more efficient and streamlined process, the charges for the arbitrator or panel can accordingly be counterbalanced.
Case study: a typical break dispute
The hypothetical facts of our case study dispute are:
- The lease contains a break option (the break date is January 2020);
- The break is subject to preconditions, including a requirement to give vacant possession;
- The landlord argues that the tenant has failed to give vacant possession, thus invalidating the break.
- The table below illustrates some potential differences between resolving the dispute through the courts and via arbitration.
The future of arbitration
Unless there is an arbitration referral clause in the underlying contract, commencing arbitration is reliant on the agreement of both parties, which may be difficult once battle lines are drawn.
It seems crucial that from the outset of contract drafting, practitioners move to consider the insertion of an arbitration clause in property contracts as a more efficient and cost-effective form of future dispute resolution.
While the courts in this jurisdiction are a fundamental part of, arguably, the most highly respected legal system globally, there seems an advancing case for arbitration to play an increased role within the property disputes field. With an influx of real estate disputes following the pandemic, particularly in respect of repayment of arrears, Covid rent suspension clauses in leases and a desire to switch to turnover rents in lease renewals, such disputes appear eminently suitable to be resolved by arbitration.
Now is no better time for the real estate sector to consider whether arbitration may be more beneficial for resolving disputes.
A typical break option dispute: court vs arbitration
|
Court litigation (England & Wales) |
LCIA Arbitration Rules |
Court timeline |
Arbitration timeline |
|
|
Pre-action conduct/ protocols |
Compliance with CPR (civil procedure rules) on pre-action conduct, including issuing formal letter before action with time for defendant to respond The parties can end up engaging in pre-action correspondence for a number of months, or even years, before proceedings are actually issued given the costs, risks and timing implications of actually issuing proceedings |
The contract (from which the dispute arises) may include an arbitration referral clause, or if there is no such clause then the parties can enter a stand-alone arbitration agreement |
January 2020 – September 2020 |
January 2020 |
|
Starting the claim |
The parties must follow the strict procedure set out in the CPR (see below) Court litigation is public |
Arbitration rules are flexible and can be agreed between the parties Arbitration is private and confidential |
October 2020 |
February 2020 |
|
Case management |
The parties will be required to attend a costs and case management conference and to adhere to strict cost budgeting rules and orders The listing of the first CCMC will be subject to court availability and could take several months A trial judge will not be allocated to the dispute until the trial date is listed, which would be in a further 12 months+ The judge in this case may have specialist experience in, say, company law or construction law as opposed to specific property/break disputes experience |
The parties can agree to adopt the rules of an arbitral institution such as the London Court of International Arbitration, which will set out the process The parties will not be subject to strict costs budgeting The parties can agree the appointment of an arbitrator (or a panel of arbitrators) and can select arbitrators based on specialist experience of property law (and with knowledge of the established technical legal principles regarding compliance with break preconditions) |
March 2021 |
February 2020 |
|
Disclosure |
The disclosure process must be undertaken in accordance with the CPR. The Disclosure Pilot may apply Disclosure can be one of the most costly and time-consuming stages of litigation given the broad disclosure requirements under the CPR |
The parties can agree the extent of disclosure and can limit the scope of disclosure to the very narrow issues in dispute |
June 2021 – |
March 2020 |
|
Witness evidence |
The new witness statement rules under the CPR must be followed in preparing witness evidence. This will be time-consuming and costly |
The parties can decide the nature and extent of any written or oral evidence that will be required |
September 2021 – November 2021 |
April 2020 |
|
Expert evidence |
There are strict court rules in the CPR as to expert report requirements, which can increase costs in compliance |
The tribunal, together with the parties, can agree the scope and extent of expert evidence permitted |
December 2021 – |
May 2020 |
|
Hearing |
It could take 12-18 months+ from issuing proceedings before a hearing is listed owing to court and counsel availability. The Covid backlog at court will result in increased delays in the court system for months, if not years, to come |
The process is governed by the parties’ and the tribunal’s availability, and means that a tribunal hearing can likely be fixed very quickly and at the convenience of the parties |
April 2022 – |
June 2020 |
|
Appeal |
Parties will need to seek permission to appeal in accordance with the CPR |
The parties waive their right to appeal the arbitration award, although there are very limited circumstances in which an appeal can be made (ie if the proper processes were not followed) |
September 2023 – September 2024 |
n/a |
|
Conclusion |
It could be more than three to four years after the break date before a final decision is made on the break dispute (assuming there is an appeal process) This creates uncertainty for a long period of time, increases costs exposure and is a continued issue for the landlord and tenant as to the status of the lease |
The dispute can be resolved quickly and with finality |
September 2023 – September 2024 |
June 2020 |
Nick Wood is a partner and Gabrielle Theunissen-Blackshaw and Sally Tang are associates at CMS
