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Real estate mediation beats litigation hands down

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Litigation is pretty much a winner-take-all proposition. Either the plaintiff wins or the defendant wins. Of course the plaintiff may win less than hoped for, and the defendant may lose more than anticipated.

Anyone who litigates today realizes the most obvious benefits of mediation -- avoiding the time, expense and stress of trying the case. Real estate mediation, however, can offer much more than that. It can bring to the parties a result that could not have been achieved in trial. Consider the following hypothetical scenarios.

Tenant enters into a five-year lease of office space from landlord. Prior to moving in, tenant installs and pays $40,000 for tenant improvements. The lease has the typical provision that no modifications may be made without the landlord's advance written permission. Tenant obtained no such permission. The lease says that if tenant commits no defaults during the term, tenant may exercise an option to extend the lease for another five years at market rent at the time of the lease renewal. Yet the option clause is in-artfully drawn; and, it is unclear how market rent is to be determined.

Tenant, who planned to amortize the cost of the tenant improvements over 10 years, timely exercises the option to extend the lease. Landlord would rather see tenant leave so he can lease the space for a longer term. He seizes on tenant's failure, five years ago, to ask permission to install the tenant improvements, and refuses to recognize tenant's exercise of the option. He threatens to evict tenant at the end of the term. Tenant sues, asking for a determination that the option was validly exercised and a ruling on the amount of market rent. Landlord promptly files a cross complaint. Both parties have thrown down the gauntlet.

In the second scenario, owner wants to subdivide his 25-acre parcel of rural land. Access to the parcel is by a five-mile dirt road. Owner is required to upgrade the road, either by paving it or putting down six inches of decomposed granite (DG). Owner chooses instead to put down a layer of crushed concrete, thought to be cheaper and more durable than DG. An unlicensed contractor friend of owner says he can get a good deal on the crushed concrete through a trucking company. The crushed concrete is loaded at a construction site, owned by city, where pavement was demolished by a wrecker company and crushed by the crusher company, and is delivered to the road site by the trucking company. Friend builds the road up with the crushed concrete, which unfortunately is full of steel bits. Thereafter, owner's neighbor drives on the road with his truck, has a blowout, rolls the truck and demolishes it. Other neighbors threaten to sue unless the road is fixed.

In scenario No. 1, unbeknownst to tenant, landlord would probably be willing to let tenant hold over for a short period of time to enable tenant to find another space. What landlord really wants is a long-term lease. Unbeknownst to landlord, tenant has an opportunity to buy a building, but can't close the deal and move for about a year. He wishes he hadn't filed his lawsuit.

Neither lawyer feels comfortable in disclosing these secret interests. Both lawyers start discovery, and at this early stage, neither wants to appear conciliatory. Yet both lawyers recognize that litigation cannot bring about desired results. Landlord realizes he has a bad case, and tenant wants out, exactly the opposite of what he asked for in his lawsuit!

Wisely, the lawyers choose early mediation. They disclose their secret desires to the mediator who, without violating any confidences, steers the negotiations to a mutually agreeable conclusion.

In Scenario No. 2, several lawsuits begin. A motion to consolidate is granted. Eight lawyers, each representing a different party, appear at a case management conference. Wisely, the judge orders the case to mediation.

As in scenario No. 1, it becomes apparent that no party, whatever the cost, can achieve an acceptable result in litigation. Friend blames the trucking company who blames the wrecking company who blames the crusher company. Litigation costs, delay, stress and uncertainty make further litigation a horror story. City, facing environmental contamination claims, doesn't want the old concrete back. The only bright light is an insurance carrier that may indemnify neighbor for the loss of his truck. The parties come to realize that the best alternatives and the worst alternatives to a negotiated agreement (what mediators call BATNA and WATNA) are entirely unacceptable.

The trick in this mediation is to help the parties rebuild the road, at minimal cost, and figure out a way to apportion this cost. While everyone denies responsibility, the mediator is able to steer all of them, including the owner, toward contributing to the removal and disposition of the defective layer of concrete, and installation of a new one.

In real estate disputes, the first response need not be to file suit. Most lawyers start things by sending a demand letter. That never works. Negotiations are difficult while parties are in denial, and the usual action then is to "tee the case up" by filing suit. Once that is done, and preferably before hand, consider mediation. It works when nothing else will.

At the National Conflict Resolution Center, a panel of expert real estate attorneys routinely guide disputants to satisfactory agreements. For more information or to schedule a mediation, contact Kathy Bayer, (619) 238-2400.

Wied is a specialist in business, bankruptcy and real estate law, and a member of the National Conflict Resolution Center's real estate panel of mediators.

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