Arbitration Required for Offset Dispute

Facts: If at any time during the lease a shopping center owner was unable to meet a cotenancy requirement, its tenant was permitted to pay a reduced “substitute rent.” The lease also provided that all disputes arising under the lease and regarding amounts less than $50,000 were to be settled by arbitration; disputes exceeding $50,000 require mediation. However, if one of the parties refused to mediate, it could resort to litigation.

A separate provision of the lease governed the owner’s remedies for an improper offset. The tenant’s withholding of any disputed amount of rent wouldn’t constitute a default under the lease by the tenant unless and until an arbitrator determined that such a right to offset had been exercised improperly by the tenant.

In 2011, the tenant notified the owner that the cotenancy requirement hadn’t been met between 2009 and 2011 and it would offset its rent for a period of months in 2011 to make up the difference of more than $50,000. The owner argued that it had three anchor tenants between 2009 and 2011, satisfying the cotenancy provision, and that an offset was improper. The tenant refused to participate in mediation, which was required under the lease for amounts in dispute over $50,000. It sued the owner instead.

The owner asked a trial court to dismiss the case, pointing out that the arbitration clause—not mediation clause—in the lease should control the issue, since it pertained to an improper offset, despite the fact that the amount exceeded $50,000. A district court denied the request. The owner appealed.

Decision: A Pennsylvania appeals court vacated the lower court’s decision and ordered that the entire case be arbitrated.

Reasoning: The appeals court determined that the district court erred in concluding that the scope of the arbitration clause in the lease didn’t cover the tenant’s claim that it had overpaid rent between 2009 and 2011. The lease indicated that a dispute involving an amount greater than $50,000 should be resolved in litigation if one of the parties refused to mediate. But the lease also states that a dispute regarding the propriety of a rent offset should be resolved in arbitration, the appeals court stressed.

However, the lease fails to state the forum in which the parties should resolve a dispute implicating both of these provisions—namely where, as here, the dispute involves an amount greater than $50,000 and involves offset and overpayment issues. Given the conflicting lease provisions, the fact that offset was arbitrable, and that the tenant’s alleged overpayment and the offset are inextricably linked issues, arbitration should be used to resolve the case, the appeals court ruled.

• Ross Dress for Less, Inc. v. VIWY, L.P., June 2014