California Union Square owns a
131,000 square foot building in San Francisco. Saks operated a department store
there since 1991. The lease is over 100 pages long and consists of 24 articles,
most of which contain both sections and subsections.
The contract provides Saks an
initial 25-year lease term, followed by five successive options to renew for 10
years each. Section 3.1 describes the initial rent, while Section 3(b) provides
the process for determining rental in each renewal period.
Renewal rents are intended to be
reset to “Fair Market Rents,” which means “the open market rental value of the [property]
for first-class retail use.” If the parties cannot agree on renewal rent, then
Section 3.1(c) requires arbitration.
As well, this lease form provides
for “baseball arbitration,” in which each party proposes its own rent determination,
and the arbitrator selects one of the two proposals. Section 3.1(c)(iv) states
that both LL and T are obligated to equally share the fees and expenses of the
arbitrator; each party pays its own attorney’s fees.
However, Section 23.10 provides that
the prevailing party in any action regarding the lease is entitled to receive
from the other party all costs and expenses, including reasonable attorney’s
In January 2016 Saks exercised a
10-year renewal option. LL and T could not agree upon Fair Market Rent. The
issue was dispatched to arbitration.
A three-day arbitration hearing was convened one year later. The arbitrator issued an Award for the LL, estimating Fair Market Rent to be approximately $11 million per year. That number was closer to LL’s proposal then that offered by Saks, as LL had proposed $13.9 million while Saks had suggested $6.25 million.
As a consequence, under the terms of
“baseball arbitration” the annual rental for the new lease term would be
LL filed a lawsuit to confirm the
award; Saks attempted to vacate it. The trial court granted Saks’ motion,
finding that the arbitrator had exceeded his powers, and ordered a new
arbitrator be appointed and the matter re-arbitrated.
In October and November 2018, a
four-day re-arbitration was held. The replacement arbitrator found in favor of
Saks and ruled that the $6.25 million rent number proposed by Saks would serve
as the Fair Market Rent.
LL filed a lawsuit to vacate the Award.
Saks defended and attempted to confirm it. Judgment was entered for Saks in
The Appellate Court affirmed the
trial court’s decision confirming the arbitrator’s second award, in favor of
LL appealed to the Supreme Court.
But the Supremes refused to review it.
Saks then moved to recover $1 million
in attorneys’ fees for litigation expenses caused by the court proceedings. The
trial court denied the request.
Ok so at this juncture I am supposed
to write about what happened thereafter. But don’t you see – it doesn’t matter.
Saks exercised its renewal option in 2016 and this issue has bounced up, down,
and through arbitration and courts for five years now.
It doesn’t appear poised to end.
Still and yet, there will be some
that need to know. To those I say: the trial court’s order denying Sak’s
recovery of attorney’s fees is affirmed.
Saks won. Saks lost. Union Square
won. Union Square lost. See California Union Square LP v. Saks & Company;
California Court of Appeals, 1st Appellate District, Division Three,
October 29, 2021: https://law.justia.com/cases/california/court-of-appeal/2021/a162043.html.
Lessons / Questions
1. Observation. Non-lawyers do not understand that in arbitration an Award is issued at the conclusion. An Award is not a Judgment. A secondary procedure is required whereby lawyers seek to convert the Award to a Judgment, which can then be enforced by sheriffs, constables, marshals, and other law officers, through the issuance of writs, turnover orders, post-Judgment discovery, and legal collection mechanisms as offered by state law.
2. Lesson. In that secondary step requesting conversion to Judgment, the Award can be contested. Even though it is supposed to be final and uncontroverted. If the dollars are large enough, a courthouse fight is coming. Again, this is after a “final” Award has been issued.
3. Question. Then what benefit is arbitration? First, if the dispute is about something obtuse then presumably an arbitrator can be found who understands nuclear reactors. Second, there are no juries in arbitration, just one or more dispassionate subject-matter experts, so it is difficult to extract a punitive amount from the loser. Third, arbitration is supposed to be confidential. No one knows the outcome, or even that parties are engaged in a dispute. That is until the Award is converted to a Judgment. See above.
Stuart A. Lautin, Esq.*
* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law, Texas Board of Legal Specialization
Licensed in the States of Texas and New York
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.