Shari is a real estate attorney, focusing her practice on drafting, reviewing and negotiating leases and related documents. Shari thrives on the challenges of puzzles, which she finds relaxing. Similarly, she regards...Read More by Author
Take Me Out To……. Baseball Arbitration
Since 1974, “baseball arbitration” has been used to resolve salary disputes between ballplayers and team owners. Its primary purpose is to determine the arbitrating player’s salary based upon specific criteria to include the player’s contribution to his team during past seasons, the length of the player’s career and the salaries of other players with similar statistics and talent.
If the parties cannot agree on a number, both the player and team owner submit their best “fair” salary determination to the other party and then to a panel typically made up of three independent arbitrators (usually labor lawyers). At the hearing, both parties, through counsel, offer evidence, and the arbitrators thereafter pick one number, either the player’s or the club’s number. That one number is final and binding.
Because the arbitrators are not allowed to split the difference or choose a number other than the club’s or the player’s, each party typically tends to worry that its submission will not be the number chosen. Accordingly, this method encourages the parties to either settle before going through this process or to propose a realistic, good faith number.
Likewise, landlords and tenants commonly resolve valuation issues by using this method. Baseball arbitration provisions are often inserted into commercial lease agreements in the event that the parties, in the future, fail to agree on:
- fair market rent for a renewal period;
- a sales price if there is a purchase option in the lease; or
- the fair market rent to be paid if the tenant exercises an option to expand the rentable square footage of its space.
The exact arbitration process should be clearly spelled out in the lease, including what factors the arbitrators should consider in determining fair market rent (or the sales price). These factors generally include:
- the size of the tenant’s space;
- the length of lease term;
- the location of the building in which the space is located versus the location of comparable buildings;
- amenities in the building and comparable buildings;
- the age of the building and comparable buildings;
- differences in base years or stop amounts for operating expenses and tax escalations; and
- the level of improvement made or to be made to the building and any comparable buildings.
The following is an example of how the mechanics of baseball arbitrations works: Within thirty days after the tenant exercises its renewal option, each party selects a certified appraiser with at least ten years’ experience in the local real estate leasing market and who has not been employed by that party within the past five years. The two appraisers so chosen are required to select a third appraiser. The landlord and tenant each notify the other (but not the appraisers) of its determination of fair market rent and the reasons therefor. During the next seven days, both landlord and tenant prepare a written critique of the other’s determination and deliver it to the other party. On the tenth day following delivery of the critiques to the other party, the landlord’s and tenant’s determinations and critiques (as originally submitted to the other party, with no modifications whatsoever) are submitted to the appraisers, who decide whether landlord’s or tenant’s determination of fair market rent is more accurate. The determination so chosen will be the fair market rent.
The drafters of the lease should also determine whether the “loser” will be required to pay for the prevailing party’s attorney’s and appraiser’s fees. If added, this language further encourages the parties to submit a faithful calculation of fair market rent.
Baseball arbitration motivates the parties to be realistic and equitable in their attempt to resolve their dispute. It further prohibits the arbitrators from meeting in the middle as a way be fair to both sides. Its unique procedure is a great way to level the playing field.
The information contained in this publication should not be construed as legal advice, is not a substitute for legal counsel, and should not be relied on as such. For legal advice or answers to specific questions, please contact one of our attorneys.