NYS favors 'unfettered' arbitration in rental disputes.

The landlord, 151 East Post Road Corp, and the tenant, 166 Mamaroneck Avenue Corp., were parties to a 42- year commercial lease for property in White Plains, New York. The lease gave the tenant the right to renew for another 21-year term under the same terms and conditions as those contained in the original lease except for the amount of rent. According to the lease, if the parties were unable to agree upon the rent to be paid during the renewal period, the rent would be fixed by arbitration as provided by New York State law.

The tenant notified the landlord of its intention to exercise the option to renew lease and the parties entered into negotiations, but they were unable to agree upon the new rent for the renewal term.

The landlord then filed a demand for arbitration with the American Arbitration Association, seeking a determination of the market rental value for the property for the 21-year renewal period. The demand was later withdrawn, and shortly thereafter the landlord notified the tenant that the lease will terminate on January 1, 1989, the original expiration date set forth in the lease.

The tenant then commenced an action against the landlord in Westchester County to appoint an arbitrator pursuant to law (Civil Practice Law and Rules 7504). The landlord moved to dismiss the action claiming that the renewal provision of the lease was so indefinite and unclear that it amounted to a "agreement to agree" and was therefore void and unenforceable.

The case reached the Court of Appeals in 1991. By unanimous decision, the Court ruled that the lease properly spelled out an agreement to have the rent decided by an arbitrator since the parties could not agree as to what it should be during the renewal period; and that the lease was valid and enforceable.

The Court stated that in order for a contract to be enforceable, it must be certain and definite as to what the parties to the contract have agreed to. If an agreement is not reasonably certain in its material terms, there can be no legally enforceable contract. A mere agreement to agree in which a material term is left for future negotiations is unforceable.

However, the Court stated that the issue of definiteness is not decided in a rigid manner. Contracting parties are often imprecise in the use of language which is, after all, fluid and often susceptible to different and equally plausible interpretations. Imperfect expression does not necessarily indicate that the parties to an agreement did not intend to form a binding contract. Thus, where it is clear from the language of an agreement that the parties intended to be bound and there exists an objective method for supplying a missing term in the contract, the Court should endeavor to hold the parties to their bargain. Striking down a contract as indefinite, and in essence meaningless, is at best, a last resort.

The Court stated that it previously ruled in Martin Delicatessen v. Schumacher (52 N.Y. 2d 105) and Cobble Hill Nursing Homey. Henry & Warren Corp. (144 A.D. 2d 518) that there are two ways in which the requirement of definiteness could be satisfied in the absence of an explicit contract term: (1) if the agreement contains a methodology for determining the missing term of the contract so that upon that determination, it would have been that which was agreed upon by the parties themselves; or (2) the agreement could provide an objective extrinsic event which would supply the missing term in the agreement.

The Court held in Cobble Hill that where the tenant had an option to purchase a nursing home at a price to be determined by the Department of Health in accordance with applicable law, the contract was enforceable since it provided for an objective standard to determine the missing term, the purchase price.

In the instant case, the parties expressly provided that a third party, an arbitrator, would determine the missing term (the rent during the renewal period) in the event the parties themselves are unable to reach an agreement. As in Cobble Hill, the parties to the lease themselves selected a process for the calculation of rent for the renewal period. They clearly intended to be bound by the arbitrator's determination. By the parties providing for arbitration, they agreed to be bound by the result. Thus, the parties agreed to an objective extrinsic standard on which the rent should be determined.

The fact that the third party is an arbitrator and not a governmental subdivision as the Department of Public Health in the Cobble Hill case, is of no consequence. Just as the Department of Health was to determine the purchase price pursuant to applicable law, so too in this case is the arbitrator circumscribed by applicable law (Article 75 of the CPLR) in determining the rent. The statute permits the court to appoint an arbitrator if a method for appointment is not specified in the agreement. The statute also sets out the manner in which awards can be confirmed or vacated or modified by the court.

Further, the Court stated that arbitration is a favored method of dispute resolution in New York. The law grants arbitrators broad authority to resolve disputes, unfettered by formal rules of law or the constraints of traditional litigation restrictions.

When the original parties to this lease consented to arbitration of a rent dispute, they necessarily entrusted the dispute to the considerable discretion of the arbitrator. The Court held that while this case was not identical to Cobble Hill, the reasoning in that case applies with equal force here. There is no doubt that the original parties to the lease fully intended to be bound by their agreement. The decision of the parties to submit any dispute as to the amount of rent during the renewal period to an arbitrator - a third party with considerable discretion, but whose discretion is delineated by law - provides an objective standard that renders the renewable clause definite and enforceable.

In the Matter of 166 Mamaroneck Avenue Corp. v. 151 East Post Road Corp. 571 N.Y.S. 2d 686