Very few words are as open to different interpretations as the word “fair.” The dictionary takes a reasonable stab at defining the word as “just,” “honest,” “impartial,” “unprejudiced,” and even “favorable.” While these are noble synonyms, they are equally as ambiguous and subjective as fair is, open to completely different meanings on the part of people who are at odds over an issue.

It’s no different in the world of commercial real estate, where fair is used in an attempt to define the market value of office space in a lease agreement. At least half the office leases in the San Diego region contain renewal options that are designed to expedite renewing leases. Roughly three out of four leases containing such provisions stipulate that the rent for the space in the renewed lease shall be at “fair market value.”

Fair market value factors typically include, among other things, what the tenant improvement package is; what, if any, are the other tenant concessions, and whether the landlord is paying a standard leasing commission.

Those factors all too often fall by the wayside in the early stages of exercising the lease-renewal option. The discussion of fair market value begins — and often ends — with the landlord submitting the adjusted rent figure to the renewing tenant with little or no justification for how that number was determined. In most cases, the new figure represents a hefty increase over the rent in the expiring lease.

It’s at this point that far too many tenants assume the following: 1. The landlord surely has information to document the increase. 2. The tenant has no choice but to accept the new figure if he wants to stay in the space. 3. Tenants have no resources to help contest the landlord’s interpretation of fair market value.

These assumptions are wrong on all three counts. For one thing, the landlord doesn’t have all the information tenants typically think he has to document the new rental fee. Landlords only have the leasing rates of their own buildings to gauge fair market value. Information about what comparable buildings are fetching in rent is not readily available to them. Brokers are the most reliable sources of leasing rate information for the buildings they represent; however they have to be very careful about divulging information on rental amounts to their clients who own and manage other buildings in order to avoid conflicts of interest.

Tenants certainly don’t have to lie down and take the rental increase without a fight. Leases that have renewal options also contain provisions for renewal arbitration. In this application, arbitration is a formal and legally binding process that uses third parties to help establish what fair market value should be in the new lease agreement. However, even a good number of those tenants who are familiar with the arbitration clause, are still reluctant to arbitrate because they feel they are alone and, because arbitration is binding, that it poses too great a risk.

Again, nothing could be further from the truth. Tenants who exercise the renewal options in their lease agreements and who disagree with what the landlord defines as fair market value should not hesitate to take the matter to arbitration.

Typically in an arbitration, the tenant retains a tenant broker who, along with the landlord’s designated representative, attempts to negotiate the fair market value of the office space. If that step fails to achieve agreement, then both sides retain an independent MAI appraiser — a seasoned professional appraiser who has earned the Member, Appraiser Institute designation — to ascertain what the fair market value should be.

Both the landlord and tenant are bound by what the arbitration process finds fair market value to be. However, the landlord has at least as much, if not more, at risk than the tenant. The amount set by arbitration can set a strong precedent that could limit what he will be able to charge his other building tenants.

The tenant does bear the expense in retaining his broker representative and paying his share of the appraisal if that step becomes necessary. However, those costs are relatively inconsequential considering all factors. It doesn’t take much of a reduction in fair market value resulting from the arbitration for the tenant to recoup his investment in the process.

Even the savings of a few cents per square foot can add up significantly. Take the example of a 5,000-square-foot user who’s paying $2 per square foot. Upon exercising the lease renewal option, the landlord informs him the fair market value of the space under the renewed lease will be $3 per square foot — a 50 percent increase. Let’s assume the tenant takes the matter to arbitration and the resultant fair market value is established at $2.85 per square foot. While significantly higher than the old rate, the 15-cent reduction does, in fact, translate to a $750 per month reduction from what the landlord had proposed. Under a typical five-year lease renewal, the $9,000 annual savings adds up to $45,000 — considerably more than what the arbitration process cost the tenant.

Nothing is a sure thing in these days of energy shortages, soaring costs for what energy there is, and $2 per-gallon gasoline. Given these uncontrollable plagues, arbitration to try to fend off outrageous rental increases is one way to control a major business expense on the part of tenants who have lease renewal options.

My parting suggestion: Use it.