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Commercial Realty Enterprises, L.L.C. v. Staples The Office Superstore East, Inc.

A-3964-04T5 (N.J. Super. App. Div. 2006) (Unpublished)

LEASES; ARBITRATION—Although, if a lease can be reasonably interpreted to compel the parties to submit to arbitration, arbitration will be ordered, a court must still analyze the arbitration text in the context of the entire lease to see if that is actually what was agreed-upon by the parties.

A lease amendment contained an arbitration provision related to reimbursement of expenses by a party if it exercises a self-help right to cure the other party’s default. The provision read as follows: “If the defaulting party shall not agree to reimburse the other for any amount paid or contractual liability incurred by the other in the exercise of its rights under [the self-help provision] within three (3) days following receipt of a bill therefor from the other, then the dispute over the amount thereof, or over the question of whether or not the defaulting party in fact should pay such amount, shall be settled by arbitration… .”

The original Lease required the landlord to maintain and repair the common facilities. It stated that if the landlord failed to do so for more than thirty days after notice from its tenant of such failure, the tenant could cure the default at the expense of the landlord and deduct the reasonable cost from future rent. A second provision in the original lease provided a general, mutual self-help right for the failure of either party, respectively, to make repairs. A second amendment made the arbitration provision specifically applicable to those two self-help sections of the original lease.

A monetary dispute arose over a provision in a fourth amendment to the lease which provided for the landlord to receive a share of any subletting profit earned by its tenant. The dispute could not be resolved through negotiation and the landlord sued its tenant in the Law Division seeking monetary damages. In response, the tenant filed a Demand for Arbitration and filed a motion in the Law Division to dismiss the complaint.

The lower court recognized the strong public policy favoring arbitration and the liberal construction to be applied to contracts in favor of arbitration, but it also recognized the requirement to construe the contract as written and the judicial obligation “to try to ascertain what the parties themselves agree[d] to.” With that in mind, the lower court then determined: “In this case we have language that on its face subjects all disputes relating to lessor or lessee defaults in making any payment or in the performance of any other obligation subject to arbitration. And viewing just that clause in itself it is unambiguously inclusive of this particular dispute and perhaps every conceivable dispute under the lease.” Essentially, the lower court believed that where “both parties provided plausible and rational interpretations of the arbitration clause, ..., the public policy favoring arbitration ... compelled” arbitration.

The Appellate Division reviewed the matter de novo. It knew that “[i]f an agreement can reasonably be interpreted to compel the parties to submit to arbitration, that liberal construction should prevail. [But, the] mere insertion of an arbitration clause in an agreement does not necessarily subject all disputes under the agreement to arbitration. The particular language of the arbitration clause and its relationship to other contract provisions must be analyzed.” The landlord argued that the arbitration clause pertained “only to a limited category of disputes, namely those in which one party has defaulted in an obligation, as a result of which the other has expended money to cure the problem and demanded reimbursement, but the defaulting party has refused to reimburse.” It pointed to the “cognate provisions in the fourth amendment to the lease which expressly made” the arbitration provision applicable to each of the repair provisions and that those repair provisions contained “cure and reimbursement remedies.” The tenant, on the other hand, argued that the arbitration clause was “all-inclusive.”

The Appellate Division agreed with the landlord. It stripped the arbitration clause of its surplus verbiage. According to the Court, this was “not the kind of situation where the aggrieved party, [the landlord], could make a payment to cure the other [party’s] default and then demand reimbursement.” In essence, the Court found it impossible to apply the “plain language” of the arbitration provision to disputes such as one over the sharing of subletting profits. It felt that “had the parties intended that all monetary disputes between them moved to be resolved by arbitration, ... they would have inserted a simple provision to that effect.” It summed up its thinking when it wrote: “If that was their intent, the rather complex and lengthy provisions of [the relevant Section] would not have been necessary.”

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