Canada: Six Considerations For Rent Arbitration Clauses In Commercial Leases

Written with the assistance of Alastair MacKinnon, student-at-law.

When a commercial tenant exercises an option to renew a lease it is imperative that the landlord and tenant have effective mechanisms in place to determine the rent for the renewal term. Ideally both parties will agree on the new rental rate, but if a dispute arises there needs to be a framework to quickly resolve the disagreement. The following are six key considerations for landlords and tenants negotiating rent arbitration clauses in commercial leases.

1. Carefully define Fair Market Rent in the Lease/Option to Renew

Typically, an option to renew allows a tenant to extend a commercial lease for a specified time period, according to the terms of the original lease, except that the rent for the renewal term is to be renegotiated on the basis of "fair market rent." The term "fair market rent" is often not defined at all or very well in many commercial leases. Time needs to be taken by both the landlord and tenant at the outset of the lease to define carefully from their perspective the term "fair market rent". The wording desired by and beneficial to the landlord may be very different from that desired by and beneficial to the tenant. Issues that should be considered by either the landlord or the tenant or both in defining fair market include whether the rent for the renewal terms is based on the improved or unimproved (i.e., original) conditions of the premises, the point-in-time for valuation, the geographic scope and use of comparable properties (e.g., same building, same street, same city, same type of use (e.g., retail space versus a restaurant)), the strength of the covenant of the tenant (e.g., a strong retailer versus a start-up restaurant), and whether or not potential tenant inducements ought to be factored in. This will focus negotiations, and give clear parameters to an arbitrator if agreement is not reached.

2. Interest on Rent Arising from the Renewal that Ends Up Being Paid after the Renewal Date

Often the arbitration that determines the "fair market rent" does not take place until long after the renewal term starts. In the mean time, the tenant normally is continuing to pay rent based upon the rental rate used during the initial lease period or a previous lease renewal period. Landlords, particularly in rising real estate markets, should consider including wording in the lease that specifies what interest rate should be charged on any difference between what the tenant initially pays for renewal-term rent, based upon the previous lease term or renewal period, and what the landlord is awarded at the arbitration. In a falling real estate market, this interest issue would be the concern of the tenant.

3. Mediation before Arbitration

With a detailed definition of "fair market value" in the lease, an experienced commercial real estate mediator may save time, expense and goodwill between the landlord and tenant. Stipulating that mediation is first and arbitration is second may help keep both parties in a negotiating mindset. A neutral suggestion from an independent party with appraisal expertise often helps parties reach agreement when they are not too far apart on what rent should be. While the arbitration clause can provide that the mediator becomes the arbitrator (a so-called "med-arb" scenario) if mediation is unsuccessful, the "med-arb" scenario is not in our view normally advisable. The parties should be concerned that any mediator who suddenly becomes the arbitrator for the same dispute, may be prejudiced in his or her decision as arbitrator by virtue of views he or she took of the parties and their positions during the mediation.

4. Design Your Arbitration Process

Arbitration is an extremely customizable process. Arbitration clauses should take advantage of this flexibility, and at minimum should specify:

  • Single Arbitrator vs. Three Arbitrators (the default under most provincial arbitration statues is one arbitrator if the parties do not specify) ,
  • Acceptable timelines for completing the arbitration,
  • The place of arbitration, and
  • The language of arbitration.

Generally, there is not sufficient money involved in most commercial lease disputes to justify using three arbitrators. Accordingly, the use of only one arbitrator will normally be specified in the arbitration clause if the default provision of the local provincial arbitration statute is not being relied upon (which default provision will also usually result in a single arbitrator being used). Unlike a judge in court, you are paying an hourly rate to each arbitrator used. Once the issue arises regarding the rental rate for the renewal term, if the arbitrator cannot be selected by agreement of the parties, most provincial arbitration statutes indicate that a Justice of the superior court of the province involved will select the arbitrator if the parties have not otherwise provided a means of selecting an arbitrator. Accordingly, parties may wish to consider specifying a third party other than a superior court judge to select an arbitrator. A number of institutions exist that can be considered for such purposes, one example being the ADR Institute of Canada, Inc.

As suggested above, most arbitration statutes allow parties, either expressly or impliedly, to contract out of most of the provisions of those statutes. Parties should consider whether they want to rely on the default provisions of such arbitration statutes, craft their own rules or perhaps even rely on rules of a third-party institution such as the ADR Institute of Canada. Generally for rent arbitrations, one wants some form of pre-arbitration production of records, particularly as it relates to comparables used by appraisers retained by the parties but not an all encompassing production of relevant records and pre-arbitration examination of witnesses such as exists in a court proceeding. This fact should be taken into account in specifying in the arbitration clause any details as to the procedure that is to be followed.

5. Have Your Lawyer Retain the Appraiser to Act as Your Expert in Such Dispute

Once a dispute appears to clearly exist between landlord and tenant, in order to preserve privilege associated with any expert report of an appraiser that is obtained, it is best if legal counsel retains such expert and requests the report. For example, this may avoid production of an appraisal report which the party initially retaining such expert may reject. Use of the lawyer at this stage can also avoid inappropriate letters being sent to an expert retaining them for the arbitration. Inappropriately worded retainer letters sent to an expert may turn out to be producible in the arbitration and embarrass the party responsible for sending such a letter, or reflect negatively on that party in an arbitration.

6. Consider a Separate Arbitration Agreement or More Detailed Arbitration Clause

Parties are not restricted to a single arbitration clause within the lease. A separate arbitration agreement, which takes advantage of the customizability of the arbitration process, can provide a much more detailed road map for the conduct of the arbitration than can be included in one or two clauses in the lease. An arbitration agreement should be created at the time a dispute arises (keeping in mind some arbitrators want their own form of arbitration agreement). If one wants certainty about the arbitration process at the time the lease is initially entered into, then a more detailed arbitration clause specifying that process should be outlined in the lease or an appendix to such lease. This will entail more upfront costs, but may avoid tactical wrangling if a dispute arises.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Gregory Liakopoulos
In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions