Real estate mediation – stop the costs before they get to court

April 1st, 2017
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By Craig Berg

Mediation is an alternative basis for resolving disputes, and in this article, I will focus on the value and advantages of mediation in commercial and residential real estate disputes. 

In a South African context, one has to consider the nature of the real estate.

Commercial real estate disputes create limited legislative hurdles for parties, such as the Consumer Protection Act 68 of 2008 (CPA) (if applicable), whereas the residential arena contains more onerous legislation, such as the Rental Housing Act 50 of 1999 (as amended) (RHA), the Prevention of Illegal Eviction from and Unlawful Occupation of Land Act 19 of 1998 (PIE) and the CPA, which are referred to in more detail below.

Compliance with the aforesaid Acts are normally adjudicated pursuant to litigation, which is costly and may affect the value of rental space and the respective parties’ interests at conclusion thereof.

The nature of the real estate

The nature of the real estate determines what disputes may arise.

Disputes generally encountered in residential real estate transactions include:

  • Incoming and outgoing inspections in terms of the RHA.
  • Non-payment of rental and ancillary charges.
  • Rights of cancellation.
  • Refunding of a deposit.
  • Reinstatement costs.
  • Differing interpretations of lease provisions by the landlord or the tenant.

More often, however, disputes emerge when dealing with the eviction of a tenant. A balancing act occurs between a tenant’s rights to adequate housing under the Constitution (s 25) versus the rights of the landlord to its property(s 26).

This balancing act is normally done by the courts under the auspices of judicial oversight and is based on its discretion (s 4(6) of PIE) in reaching a just and equitable outcome for the parties after considering the factual matrix of each matter.

The court has to balance the rights of the parties to ensure that justice and equity prevail (see Port Elizabeth Municipality v Various Occupiers 2005 (1) SA 217 (CC)).

Parties, or at least one of them, are often not satisfied with the outcome.

Disputes encountered in commercial real estate transactions include –

  • rent calculations or review;
  • escalation calculation or review;
  • rebuilding and relocation;
  • sub-letting;
  • improvements, changes or alterations to the premises;
  • tacit relocation;
  • responsibility for repairs/reinstatement;
  • right of retention and enrichment liens;
  • damages;
  • legislation; and

Tenant installation, beneficial occupation and delivery of commercial space also create numerous disputes.

A court, in the granting of eviction orders, may use its discretion to delay the execution thereof (see Paardevlei Properties (Pty) Ltd v TNV Plastics (Pty) Ltd and Another (WCC) (unreported case no 2450/2016, 21-6-2016) (Bozalek J)).

Benefits of mediation

Mediation, as an alternative to litigation, advances parties’ respective interests instead of adjudicating on them and requires willingness to compromise by the parties.

Mediation can produce results in the most unpropitious of circumstances (MB v NB 2010 (3) SA 220 (GSJ)), especially when conducted by people who have been properly trained in the process.

Mediation is likely to ensure a just and equitable outcome based on consensus between the parties.

Most recently, in the matter of City of Cape Town v Those Persons Occupying and/or intending or attempting to occupy or erect structures on erf 18370, Khayelitsha (WCC) (unreported case no 13700/14, 14-12-2015) (Nuku AJ), Nuku AJ suspended an eviction order brought by the City of Cape Town, one of the reasons being ‘where a municipality applies for an eviction it is bound to act reasonably. Part of acting reasonably is the engagement with those who are to be evicted as that ensures that they are treated with dignity in the process’.

Mediation encourages reasonable engagement between the parties in a less adversarial way and should this path of least resistance be unsuccessful, the parties are free to approach the courts, perhaps on more favourable terms curtailing costs, time and stress.

From a commercial point of view, an early and satisfactory business solution ensures that the parties save face, satisfy shareholder concerns and automatically mitigates damages as both parties have certainty.

Mediation achieves among other things the following:

  • Less time and costs compared to litigation as mediation is often completed in a day at a fraction of the cost of litigation or arbitration.
  • The cost of mediation is agreed on and legal representation is not required.
  • Commercial property transactions often involve complex leases with detailed restrictions and requirements, which may include various exclusivity and other technical provisions.
  • While judicial officers are capable jurists who familiarise themselves with a case quickly, there are significant advantages to having disputes resolved by a mediator with the knowledge and expertise of commercial real estate transactions who may create solutions generally not possible or available in the litigation process.
  • The parties control the process.
  • The parties are instrumental in creating resolutions and generally abide by it.
  • The proceedings are confidential and, therefore, keep reputations intact.
  • Mediation usually reflects a level of trust and recognises that the adversary is a responsible party who will act fairly and in good faith during the mediation.
  • Parties are more inclined to speak more freely during a confidential mediation than at trial.
  • Mediation offers a party an opportunity to understand the strengths and weaknesses of their case and forces the party to consider the analysis and perspective of an objective third-party and to be more realistic in his or her approach to resolution.
  • The parties resolve the outcome instead of a judicial officer and the satisfaction with the outcome is greatly increased.
  • Many commercial real estate experts cite the preservation of business relationships as a major advantage to resolving disputes through mediation rather than litigation and often save the opportunity for the parties to collaborate in future.

Mediation clauses

The confidence in mediation has grown in South Africa (SA) as can be seen from the introduction of court-annexed mediation in 2014, by the Minister of Justice under the auspices of the rules regulating the conduct of proceedings of the magistrate’s courts of SA, in ch 2 of the rules, and in conjunction with the Magistrates’ Courts Act 32 of 1944 (as amended).

Mediation will force parties to come to the table and should aid in identifying the issues that are hiding under the surface, the so-called ‘Iceberg Theory’, whereas litigation can create smoke and mirrors caused by elegant and articulate writing and arguing. Mediation leaves less room to manoeuvre.

On the next page is an example of a mediation clause, which readers may want to use or adapt to suit their client’s needs:

Mediation

1.

The parties agree to attempt to resolve any dispute, claim or interpretation arising out of or relating to this agreement by mediation, which shall be conducted under the then current mediation procedures of the Accredited Court-Annexed Mediators Association (AFSA), or any other procedure upon which the parties may agree. The parties further agree that their respective good faith participation in mediation is a condition precedent to pursuing any other available legal or equitable remedy, including – litigation; arbitration; or other dispute resolution procedures.

2.

Either party may commence the mediation process by providing the other party written notice, setting forth the subject of the dispute, claim or controversy and the relief requested. Within ten days after the receipt of the foregoing notice, the other party shall deliver a written response to the initiating party’s notice. The initial mediation session shall be held within ten days after the initial notice. The parties agree to share equally the costs and expenses of the mediation (which shall not include the expenses incurred by each party for its own legal representation in connection with the mediation).

3.

The parties further acknowledge and agree that mediation proceedings are without prejudice and largely settlement negotiations, and that, to the extent allowed by applicable law, all offers, promises, conduct and statements, whether oral or written, made in the course of the mediation by any of the parties or their agents shall be confidential and inadmissible in any arbitration or other legal proceeding involving the parties; provided, however, that evidence which is otherwise admissible or discoverable shall not be rendered inadmissible or non-discoverable as a result of its use in the mediation.

4.

The provisions of this section may be enforced by any court of competent jurisdiction, and the party seeking enforcement shall be entitled to an award of all costs, fees and expenses, including reasonable attorneys’ fees, to be paid by the party against whom enforcement is ordered.

Recent case law

In consideration of recent case law, I have reached the conclusion that once an agreement imposes an obligation on parties to negotiate, then it should follow that any negotiation must be done in good faith.

Recent constitutional jurisprudence has raised the concept of negotiation in good faith and the development of the common law of contract to bring it in line with constitutional principles such as Ubuntu (meaning: ‘A quality that includes the essential human virtues; compassion and humanity’ (https://en.oxforddictionaries.com, accessed 22-2-2017)). This should follow suit in mediation, which is a form of inquisitive negotiation.

Cases such as Makate v Vodacom Ltd 2016 (4) SA 12 (CC) and Everfresh Market Virginia (Pty) Ltd v Shoprite Checkers (Pty) Ltd 2012 (1) SA 256 (CC) refer to the duty on parties to negotiate in good faith when they are contractually bound to do so.

The CC in Nkata v FirstRand Bank Ltd 2016 (4) SA 257 (CC) emphasised that the National Credit Act 34 of 2005 was a clean-break from the past and encourages dialogue between consumers and credit providers, leaving room for mediation in agreements of this nature as well.

Conclusion

Mediation aims to benefit borrowers, lenders, purchasers, sellers, consumers etcetera, in respect of loan, purchase, sale, or lease agreements and has the potential to remove a dispute from the high-cost litigation system to a more efficient, cost-effective mediation.

Even if the parties do not resolve the dispute by mediation, the mere conducting of the mediation process will place the parties in a position to identify the real issues in dispute and the parties can always agree to approach a court or arbitrate on a ‘stated case basis’, which will limit costs, time and unnecessary delays such as postponements, non-allocation of magistrates or judges or the dreaded ‘sick note’.

‘A renewed emphasis on creative, privately developed approaches where people take ownership for resolving disputes may provide courts more time and resources to focus on those matters that genuinely require public trial’ (Jerry Slusky ‘Mediating the commercial Lease Dispute’ (www.mediate.com, accessed 22-2-2017)).

Craig Berg LLB (UJ) is an attorney at Craig Berg Inc in Cape Town.

This article was first published in De Rebus in 2017 (April) DR 24.

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