Arbitration, on the other hand, is a more formal and binding process. It is essentially a private trial. The landlord and tenant present their cases to an impartial third party, the arbitrator, who acts much like a judge. After hearing the evidence and arguments from both sides, the arbitrator renders a binding decision. This decision is legally enforceable and, in most cases, cannot be appealed. An arbitration clause in a lease effectively means the parties are waiving their right to have their dispute heard in a public court.

Many modern leases include a multi-step dispute resolution clause. It might require the parties to first attempt to resolve the issue through informal negotiation. If that fails, they must proceed to mediation. Only if mediation is unsuccessful are they permitted to either file for arbitration or proceed to court. These clauses are designed to de-escalate conflict and provide a faster, more cost-effective path to a final resolution. For both landlords and tenants, they can be a valuable tool for preserving the business relationship and avoiding the immense costs of a formal lawsuit.