The recent decision by Hon. Shirley Werner Kornreich in Broadway Retail Owner, LLC vs. McDonald’s Corp., No. 651884/2014, 2017 N.Y. Slip. Op. 50011(U), 54 Misc.3d 1206(A) (Supreme Court, New York County, Jan. 9, 2017) concerned a very common provision in commercial leases, which established future rent based upon a percentage of the fair market rent (“FMV”), and provided that if the parties could not agree on the FMV, the issue would be resolved by a binding arbitration. The FMV percentage amount in McDonald’s was 90%.
After the parties could not agree on the FMV, an arbitration was commenced. The panel found that the FMV was $5,354,893, 90% of which was $4,819,404. The landlord submitted a petition to Judge Kornreich seeking to vacate the award. In her decision, Judge Kornreich emphasized the extremely heavy burden that must be met to vacate an arbitration award, which in most cases is a showing that the party was prejudiced by corruption, fraud or misconduct in procuring the award, or that the arbitrator was biased. The Judge found that the landlord’s sole argument concerned alleged misrepresentations made during the arbitration by McDonald’s and its counsel regarding a decision that Judge Kornreich had issued in a previous related action. Based on this finding Judge Kornreich denied the petition because the landlord’s allegations concerned the allegedly improper conduct of a party, rather than the arbitrators.
This decision brings home the point commercial lease parties must comprehend when they include a FMV/arbitration clause in a lease – the agreed-upon arbitration will be their last legitimate bite at the apple if a dispute arises because the chances of vacating awards are minimal at best. In order to reduce the odds of a poorly reasoned award, parties should seek terms that allow them to control the arbitration proceeding to the extent that they can. Examples of such terms include those that mandate arbitrator qualifications, the use of party selected and/or neutral arbitrators, the appraisal methods to be utilized, the arbitration administrator (i.e., the AAA), and the rules to be applied (i.e., the AAA’s Real Estate Industry Arbitration Rules).