UK: Dispute Resolution In Real Estate Contracts

Last Updated: 20 January 2014
Article by Emma Hickson

Summary and implications

Property contracts commonly provide (often by default) for litigation in the event of a dispute arising. However, the courts may not always necessarily offer the best way of resolving disputes, particularly where the parties want to continue to enjoy a close working relationship. Indeed, there are some key property related disputes that are much better resolved through alternative dispute resolution (ADR).

The purpose of this article is to identify the discrete areas where ADR is used effectively in a property context, and to consider the advantages of different types of dispute resolution.

Litigation or ADR?

ADR is a collective description of methods of resolving disputes otherwise than through the normal trial process. The potential ADR mechanisms available are manifold and include:

  • negotiation – where the parties interact and try to solve the problem themselves. Participation is voluntary and there is no third party who facilitates the resolution process or imposes a resolution;
  • mediation – where a neutral and impartial facilitator with no decision making power assists the parties in negotiating a mutually acceptable settlement;
  • independent expert determination – where the parties appoint an impartial third party with relevant expertise to make a binding determination on the issues in dispute; and
  • arbitration (under the Arbitration Act 1996) – a quasi-judicial process which offers parties the opportunity to present their case and to submit evidence at a private hearing. A third party adjudicator (or, less often in real estate disputes, a tribunal of three adjudicators) will hear the evidence and make a binding decision on the issues.

Litigation and these various forms of ADR are not mutually exclusive, and different permutations of these can be incorporated into contracts, depending on the requirements. A contract could include a multi-tiered clause, where the parties agree (for example) to mediate in the first instance and then proceed to arbitration if that is unsuccessful. Alternatively, a contract could contain a carve-out clause, where it is agreed (for example) that some disputes shall be resolved through arbitration/litigation and any other disputes will be referred to an expert for determination.

Generally speaking, ADR is considered more cost effective than litigation and can help parties resolve their disputes more quickly. Other than possible cost and time savings, there are several features of ADR which are commonly cited as advantages over litigation:

a) Privacy/confidentiality

ADR is a private process and so any discussions, hearings or documents exist outside the public domain. This is in contrast to litigation, which in most cases takes place in open court and where documents are usually publicly available.

However, the publicity of court proceedings and the spectre of a public judgment against a party may add pressure and may be one of the factors that encourages a party to settle.

b) Industry expertise

Some forms of ADR allow the parties to choose a third party who has expertise in the relevant industry sector and knowledge of actual practice to resolve their dispute. In contrast, a judge may have no substantive experience in the industry or area of dispute, potentially limiting their ability to evaluate the evidence. Choosing a third party with a relevant background should benefit both parties and give them greater confidence in the decision being made.

c) Finality of decision

It is much harder to appeal or challenge an arbitral award or an expert determination than it is to appeal a judgment from court. This gives a successful party greater certainty that the decision in their favour is final. Even the losing party may appreciate the finality of an arbitral decision because it enables the parties to draw a line under the dispute fairly quickly, by avoiding long, drawn-out appeal processes, and means they are more likely to be able to move forward with their business relationship intact.

d) Disclosure

Disclosure (the production of documents to the opposing party) is an expensive and time-consuming component of English court proceedings. Although recent reforms have sought to rationalise the court's approach to disclosure, it is still likely to be a substantial burden.

In ADR proceedings disclosure is likely to be much more limited, where it is required at all, therefore saving both time and money.

e) Informality

ADR tends to be less formal than litigation, which may encourage a less hostile atmosphere and so may be more conducive to protecting an ongoing business relationship between the parties. The procedures also tend to be more flexible than litigation (which is bound by court rules) and can be adapted to the needs of the parties.

Dispute resolution provisions in real estate contracts

Rent review

Rent review clauses in commercial leases will invariably provide for the appointment of a third party, usually a surveyor, to determine the new rent if the parties are unable to agree.

The third party can be chosen by the parties together, or if they cannot agree the third party can be appointed by a body identified in the lease (usually the Royal Institution of Chartered Surveyors). The surveyor can act as either an arbitrator or an expert – the lease may specify which, or it may give the landlord power to choose at the time of the referral.

Expert determination is often thought to be quicker and cheaper than arbitration, but the recourse available to the parties if they do not like the decision reached will be very limited (even more so than with an arbitral award). Generally, the cost of appointing an expert is likely to be lower than appointing an arbitrator. An expert appointment may therefore be more appropriate for lower value leases or where there are unlikely to be difficult valuation issues. It is important to consider which is most appropriate for the particular property when a lease is first entered into.

Suspension of rent on damage by insured risks

In the case of damage by insured risks, leases may provide for disputes over the amount or period of rent suspension to be settled by arbitration under the Arbitration Act 1996.

Renewal leases under the Landlord and Tenant Act 1954 (the 1954 Act) and PACT

Professional Arbitration on Court Terms (PACT) is a scheme which provides landlords and tenants with an alternative method of resolving disputes over the terms of a renewal lease under the 1954 Act. The 1954 Act provides for the terms of a renewal lease to be determined by the courts. PACT delegates the determination to an independent third party, who may act as arbitrator or expert. Benefits of using this scheme include the ability to choose an independent third party with relevant specialist knowledge, flexibility in procedure and timing outside the restraints of a formal court hearing. There may also be time and costs savings.

Construction contracts and the HGCRA

A statutory form of arbitration (known as adjudication) is provided for under the Housing Grants, Construction and Regeneration Act 1996 (HGCRA) in relation to "construction contracts" i.e. those which involve the carrying out of "construction operations".

For the purposes of the HGCRA, a construction contract is defined as an agreement for the carrying out of construction operations (whether by one of the parties, or a sub-contractor) or the provision of labour for the carrying out of construction operations. It also includes agreements to do architectural, design or surveying work in relation to construction operations, and agreements to provide advice on building, engineering, decoration, or the laying-out of landscape. However, although the definition is widely defined, it is worth noting that some real estate contracts are excluded – for example agreements for lease and certain development agreements.

A party to a relevant construction contract has the right to refer a dispute arising under it to adjudication, and if the contract does not provide for a scheme of adjudication which satisfies the requirements in the Act then the statutory scheme will apply (overriding the contractual provisions).

Adjudication is designed to be swift, and adjudicators' decisions are "interim-binding" in that they are binding unless and until the dispute is finally determined by legal proceedings, arbitration or by agreement. However, successfully challenging an adjudicator's decision is rare.

Applicability of ADR to real estate contracts

Broadly speaking, when it comes to real estate contracts, ADR is only used in specific circumstances such as those illustrated above. However, it is worth noting that, even where contracts do not expressly contain ADR clauses, the parties may still agree once a dispute has arisen to use alternative methods to resolve it.

Indeed, the courts are vehement in their criticism of parties in dispute who have not properly considered the use of ADR before continuing to a full hearing, and have the power to impose costs sanctions to penalise parties for this. Therefore, even if ADR is not expressly provided for, if a dispute arises, then the parties should give due consideration to whether it might be appropriate to attempt some form of ADR before progressing to court.

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.

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