Should You Agree to Prelitigation Mediation?

Mediation is an informal proceeding before a third party neutral (often an attorney or retired judge), who will listen to the parties’ arguments, evidence and concerns, and assist the parties in fashioning their own resolution to a dispute. The trend towards mediation as a form of alternate dispute resolution (“ADR”) grew out of an overburdoned court system. Mediation became an effective means to alleviate that congestion, by resolving cases efficiently outside the court system. This type of mediation often takes place after a lawsuit has been filed, and significant costs and time have been spent on litigation and discovery, after which the case is either ordered to mediation by the court or the parties voluntary agree to mediate prior to trial. In the context of commercial leasing, numerous disputes concerning lease terms can be resolved promptly by mediation:

  1. rent calculations,
  2. covenant of quiet enjoyment issues,
  3. annual calculations of property tax and common area expenses,
  4. assignment or subletting restrictions,
  5. maintenance issues,
  6. disputes involving other tenants.

Lately, many parties opt for pre-litigation mediation, where the parties are attempting to settle the dispute before litigation is even filed. In fact, many commercial leases contain a provision that requires the parties to the lease agreement to attempt to resolve dispute by mediation prior to bringing a lawsuit. Typically, the agreements contain a “penalty” for refusing to mediate the dispute by stating that the party who refuses to participate waives his right to recover attorneys’ fees even if he wins in subsequent litigation. Therefore, there is substantial reason to use this form of mediation to attempt in good faith to resolve the dispute.

Pre-litigation mediation has two very important benefits: cost and confidentiality. If a dispute can be resolved prior to the filing of any litigation, then significant legal fees and court costs may be avoided. It is also beneficial where the parties wish to maintain an ongoing relationship. For many parties, especially business, the confidentiality that pre-litigation mediation can provide is extremely valuable. Since no litigation has been filed, there may not be any public record of the existence of the dispute. Further, the parties can include confidentiality provisions in the settlement agreement to prevent subsequent disclosure of the nature of the
dispute or the terms of the settlement to third parties. Also, many aspects of the mediation process, including any statements made by the parties in the mediation are confidential under California law, and inadmissible in any subsequent court proceeding.

Another important benefit of mediation is that the parties may fashion their own resolution. Real estate transactions often include complex documents with numerous terms.  Sophisticated business people in mediation can often resolve their dispute on business terms in a manner that is mutually beneficial. In contrast, the courts are only empowered only to analyze a given fact situation to determine who is the winner and loser. Often both parties in litigation are dissatisfied with the result. Finally, since mediation is nonbinding, the parties are not bound by the process and can always opt for litigation if the dispute is not resolved.

Pre-litigation mediation is not appropriate for all cases. In order for mediation to be effective, the parties must participate in good faith- that is with an honest willingness to compromise in order to resolve the dispute. If there is a concern that the other party is simply on a “fishing expedition” to gather information that may be useful in subsequent litigation, prelitigation mediation may not be well advised. Also, if a dispute is fairly complex in nature, it may not be possible to resolve the matter until the issues have been clearly defined by the pleadings in litigation and the facts are clarified by way of depositions and other discovery.

Understanding the benefits and possible disadvantages of pre-litigation mediation are necessary for a commercial landlord to develop a cogent strategy for resolving a dispute. Even if the parties opt for pre-litigation mediation, it is advisable to consult with competent counsel to ascertain the party’s rights and possible remedies.