California Court Awards Attorneys' Fees to Tenant Despite Landlord's Voluntary Dismissal of Unlawful Detainer Action Before Trial

In a blow to commercial landlords, the California Court of Appeals for the Third District recently ruled in the case of Drybread v. Chipain (2007) that a landlord who voluntarily dismisses an unlawful detainer action against a tenant may in some circumstances be held liable for the tenant's attorneys' fees and costs.

The case involves a sublease entered into by plaintiff Drybread as sublandlord ("Sublandlord") and defendant Chipain Chiropractic Corporation as subtenant ("Subtenant"). Subtenant hired Sublandlord to work as a chiropractor in its chiropractic business at the subject premises. A dispute arose between Sublandlord and Subtenant over their employment relationship. As a result and after the one-year sublease term expired, Sublandlord served Subtenant with a Thirty-Day Notice to Quit. When Subtenant did not vacate the premises, Sublandlord filed an unlawful detainer action against Subtenant.

Shortly after Subtenant answered, Sublandlord dismissed the case without prejudice. Thereafter, Subtenant moved for attorneys' fees as the prevailing party in the unlawful detainer action. The trial court denied the motion on the ground that a party to a contract who voluntarily dismisses a case prior to trial is not entitled to attorneys' fees under Civil Code section 1717(b)(2). Subtenant appealed, urging that this particular unlawful detainer action, involving a holdover after the expiration of a sublease - sounded in tort, not contract, and that, as a result, the prohibition against contract-based attorneys' fee awards in Civil Code section 1717(b)(2) did not apply.

On appeal, the Court of Appeals for the Third District was presented with two questions. First, did the unlawful detainer action "look" more like a tort or a breach of contract claim? Second, if a tort, was it the kind of tort that would provide the basis for an award of attorneys' fees if the attorneys' fees provision in the sublease was sufficiently broad?

Sublandlord argued that the claim was of a contractual nature as the entire tenancy relationship between the parties arose out of the sublease and there would have been no landlord/tenant relationship without the sublease. The appellate court disagreed, holding that while unlawful detainer actions based upon a breach of lease during the lease's term are of a contractual nature, unlawful detainers based upon a tenant unlawfully holding over after a lease's term expires are more in the nature of a tort.

The Court of Appeals based its ruling in part on the fact that neither the notice to quit nor the unlawful detainer complaint alleged a breach of the sublease. Curiously, there was no discussion in the decision as to whether the sublease contained a provision spelling out the consequences of an unauthorized holdover by Subtenant.

The Court also found that the attorneys' fees clause in the sublease was broad enough to encompass an action in tort between the parties. The Court relied on a line of cases permitting the recovery of attorneys' fees by the prevailing party in disputes where (1) the court found no enforceable contract to have existed or (2) no breach of contract occurred.

If this decision makes little or no sense to you, you have a lot of company. The lesson to be drawn (other than to invest in Arizona real estate) is to make sure (1) your counsel considers the holding of this case while drafting your notices to quit and unlawful detainer pleadings and (2) you as a landlord take extra care in determining whether or not to file an unlawful detainer action against a tenant who is unlawfully holding over after the expiration of a lease. Unlike in virtually all other unlawful detainer actions, the landlord here will not have the freedom to dismiss the case prior to trial free of the potential liability for the tenant's attorneys' fees and costs. Accordingly, a landlord considering a voluntary dismissal of a pending unlawful detainer suit of this type should first seek an agreement with the tenant pursuant to which each party bears its own fees and costs. As an unfortunate result of this case, some unlawful detainers will proceed to trial not out of a concern over the merits of the suit, but merely to avoid the potential liability for attorneys' fees and costs under the contract, the very concern which originally brought Civil Code section 1717(b)(2) into being.

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. This Real Estate Update was prepared by Peter Olson of the firm's San Diego Office. He can be reached at polson@gordonrees.com or (619) 230-7759.