Leases typically contain attorneys' fee provisions that allow the prevailing party in an action brought on a lease to recover its attorneys' fees. Such provisions are often considered a formality or "boilerplate" and, as a result, do not receive careful attention during lease drafting. However, the reality of litigation is that sometimes landlords do wind up on the losing end and, as a consequence, are at risk for the assessment of the tenant's attorney's fees and costs. A further reality is that the fees and costs awarded the tenant can sometimes match or exceed the amount in controversy. Given that a landlord isn't particularly crazy about the idea of having to pay for its own attorney's fees and costs, should all these factors collide, we would expect to find ourselves with one seriously unhappy landlord.
Such a hypothetical scenario recently played out in real life in the California Court of Appeal decision of Cruz v. Ayromloo (2007) 155 Cal.App.4th 1270. In Cruz, a landlord was sued by 32 tenants for breach of lease (landlord's alleged failure to return their security deposit) and several tort causes of action, including forcible detainer, wrongful eviction and negligent infliction of emotional distress. Though only four of the tenants had a written lease with the landlord, the trial court, after finding in favor of the 32 tenants at trial, on post-trial motion awarded the four tenants with written leases $123,992.80 in attorney's fees. The attorneys' fee provision in the written leases each provided that if a "civil action is instituted in connection with this Agreement, the prevailing party shall be entitled to recover court costs and any reasonable attorneys' fees."
On appeal, several issues were raised by the landlord, including the undisputed fact that a significant amount- if not most- of the tenant's attorneys' time was spent on the tort (or non-contract) claims. The landlord argued that the lease's attorneys' fee clause should only provide the basis for recovery of attorneys' fees incurred in litigating the breach of lease claim. The Court of Appeal rejected that argument, finding that the express language of the attorneys' fees clause did not limit the applicability of the provision to actions only "on the lease" or "to enforce the lease," but rather to any action brought "in connection with" the Lease. This language, the Court held, allows for an award of fees for all services rendered in the litigation, regardless of whether or not the relief is based on tort or contract.
The lesson in Cruz is that conscientious landlord's counsel should consider modifying the attorneys' fees provision in a lease to limit its application to actions for breach of lease or unlawful detainer. It is the rare landlord that has an interest in asserting tort claims against a tenant. The claims arising directly from the language of the lease or, in the case of an unlawful detainer, the unlawful detainer statute (Civil Code section 1161, et seq.), generally furnishes the landlord with all of the firepower it needs to obtain its litigation objectives- typically possession, the recovery of rental/ breach of lease damages and reimbursement of its attorneys ' fees and costs. Tort claims are much more frequently advanced by tenants, often as a defensive measure in the form of a cross-complaint in response to a landlord's breach of lease complaint. Thus, a provision limited to only "the prosecution or defense of unlawful detainer and breach of lease actions and no other claims, tort or otherwise" could have, at least in the Cruz decision, saved the landlord a substantial sum of money.
Though the proposed language has yet to be tested by the California courts, in the commercial context the parties to a lease are presumed to be knowledgeable, sophisticated and deal with each other at arm's length. In such a scenario, the above limitations should be enforced so long as the Court does not find the provision violative of public policy (and it shouldn't). By tailoring the attorney's fees provision in such a fashion, a landlord may have little or nothing to lose and potentially, as in Cruz, a small fortune to gain.
If you have any questions regarding any real estate legal matter, in San Diego please contact Brian Frasch (litigation) at bfrasch@gordonrees.com or Eric Young (transactions) at eyoung@gordonrees.com or call us at (619) 696-6700. In San Francisco, please contact Phil Wang at pwang@gordonrees.com or call us at (415) 986-5900.
|
