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Suppose Party B signs a one year contract with a binding arbitration agreement to rent commercial space from Party A. As part of the agreement, Party B agrees to pay $2,000 a month rent to Party A (the landlord) and $1 a month for each square foot it occupies to Party C (another company who occupies space in the same building) for its share of utilities.

At this point, Party C has no connection to Party A. They just happen to rent space from Party A in the same building and voluntarily took on the responsibility of paying the utility bill. Every tenant has an agreement with the landlord to pay Party C in proportion to the amount of space it occupies. The agreement, however, was only signed by Party A & B, not by Party C. Party C continues accept money for utilities from Party B.

After several years, Party C acquires ownership of the entire building and Party B wishes to dispute the amount paid for utilities during the first year - either because it turns out that it paid more than $1 per square foot or because it miscalculated the number of square feet it was occupying and should have paid less.

Is the dispute subject to arbitration?

One one hand, Party C did not own the building when it accepted the utility payments from Party B and at that point it did not inherit any of the obligations of the prior owner. On the other hand, now that it acquired the building and inherited the obligations of the prior owner, perhaps as the recipient of the extra utility payment, the arbitration agreement gains retroactive force?

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  • When Party C acquires ownership of the building, is it an assignee of the lease from A, or is the lease with A terminated and replaced with a new lease from C? It also depends on the language of the arbitration agreement with A.
    – ohwilleke
    Jan 13, 2023 at 20:34
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    @ohwilleke Party C inherited the lease from Party A. There was no new lease signed and he inherited the old lease as a matter of law. So yes I would say that Party C is an assignee of the lease from A.
    – S.O.S
    Jan 18, 2023 at 16:58

2 Answers 2

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It’s not a question of retroactively

When Party C became the principal of the contract, they assumed all the rights and obligations of Party A - including the right/obligation to arbitrate disputes.

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  • @ __ Dale M. Are you saying that this dispute would be subject to arbitration or that it wouldn't be subject to arbitration?
    – S.O.S
    Jan 17, 2023 at 16:48
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should have paid less. Is the dispute subject to arbitration?

At the outset, the answer is no, although it ultimately depends on the exact terms of the contract(s).

A change of ownership does not merge C's non-landlord (or "extra-contractual") capacity with the landlord capacity that C subsequently attained. Nor does a change of ownership automatically modify the scope of the arbitration agreement. Any such modification would have to be provided in the agreement itself or via an agreed amendment.

B's claim against C is in C's non-landlord capacity. For that type of claims, B and C are each entitled to litigate as if no arbitration agreement existed.

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  • @ __ Iñaki Viggers Thanks so much for your reply. It seems that you and @ _ Dale M have apposing views on this very question. I would love to see some proof to support either side. Is there any proof that Party C does not inherit the rights / obligations of Party A retroactively?
    – S.O.S
    Jan 13, 2023 at 17:31
  • @S.O.S "Party C does not inherit the rights / obligations of Party A retroactively?" There is certainly a transfer of rights and duties when A sells to C the property. But transfer and expansion are two different things. An obligation to arbitrate a type of claims which prior to the sale was not subject to the arbitration agreement means expanding the scope of that agreement. That expansion requires both B's and landlord's (whoever that happens to be) free consent. Neither party is to be compelled onto an expansion that was not agreed upon when the arbitration agreement was entered. Jan 13, 2023 at 20:15
  • _ But transfer and expansion are two different things_ But the lease did contain a provision that requires B to pay utilities to C. At the time C was not a party to the agreement but once it required ownership and inherited the lease it turns out that (retroactively) it could be read as if the lease stated that Party B would pay rent + utilities to Party A since C now stands in A's shoes. While I don't necessarily disagree with your conclusion, I'm not sure I understand why you are looking at this like an expansion. Are there any case precedents (in NJ) to back this understanding? Thanks!
    – S.O.S
    Jan 13, 2023 at 20:41
  • @S.O.S "why you are looking at this like an expansion" Because the scope of the arbitration agreement is not supposed to vary depending on who [incidentally] happens to replace the initial landlord (or at least your description does not indicate that that is the case). A change of ownership does not merge the two relations B entered at the beginning: one involving a landlord capacity, and another one involving a non-landlord one. Your characterization of the arbitration agreement pertains to the former only, whereas utility payments to new landlord C remain in non-landlord capacity. Jan 13, 2023 at 21:27

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