Draft Favorable Attorneys' Fees Clause

An attorneys' fees clause in a commercial real estate lease defines who will pay the legal fees for a dispute between the tenant and owner. It is critical to draft an attorneys' fees clause in your retail or office building lease that makes the tenant responsible for any legal fees arising from its potential default and relieves you from paying for the cost of a lawyer to help you resolve your own issues with it that may arise.

Don't give your tenant a strong attorneys' fees clause that it can later use as leverage to discourage you from suing it over anything but extremely large disputes.

Consider Standard Reciprocal Clause

An attorneys' fees clause can be triggered by any situation that must be resolved by a tenant's or your attorney. For example, if your tenant refuses to pay common area maintenance (CAM) costs because it believes that the parking lot is not being properly maintained, you must call an attorney to make a phone call or write a letter to the tenant.

The best possible attorneys' fees clause would make your tenant responsible for all litigation in any situation. Your tenant will probably not agree to these provisions, but you should still attempt to include this language in your lease:

Model Language

In the event of litigation relating to the subject matter of this Lease, Tenant shall be responsible for its own and Owner's attorneys' fees and costs resulting therefrom.

Your tenant may be more willing to agree on a reciprocal attorneys' fees clause. “A standard retail or office building form lease starts out with the presumption that if the owner has to take any action as a result of the tenant's default, the owner is entitled to the cost of the fees it has incurred—whether it actually goes to court or just spends time and administrative efforts in trying to collect the money,” explains Toronto real estate attorney Stephen J. Messinger.

Under this typical reciprocal attorneys' fees clause, should a lawsuit occur, the losing party is responsible for paying all of the legal fees—for both parties. An attorneys' fees clause like this one will help you recover if your tenant is in default and you have to hire or consult an attorney to deal with the situation or take actions, by requiring it to pay for your legal costs and its own if you win your case.

Model Language

In the event of litigation relating to the subject matter of this Lease, the nonprevailing party shall reimburse the prevailing party for all reasonable attorneys' fees and costs resulting therefrom.

PRACTICAL POINTER: Be aware that if you personally write a letter to a tenant to enforce the lease, the attorneys' fees clause in the lease is not triggered. However, make sure that you charge the tenant for the administrative fee you are entitled to, which may already be written into the form leases you use for typical tenants.

Make Tenant Bear Cost of Legitimate Claims

While a reciprocal attorneys' fees clause will shift the responsibility for litigation costs to the tenant if you win your lawsuit against it, you still will be on the hook for all of the legal fees for the case if you lose—even if you had a legitimate claim. Try to negotiate lease language that relieves you from paying the tenant's attorneys' fees if your claims are “reasonable” or “equitable.” This lease language will limit your costs for justifiable claims even if the tenant prevails:

Model Language

Tenant agrees to pay all reasonable attorneys' fees for Owner's reasonable and equitable claims against it, regardless of whether Owner or Tenant prevails on such claims.

Leave Fees Up to the Court

Sometimes, as a result of bargaining power, a tenant and owner decide to purposely omit an attorneys' fees clause and let the court decide fees for disputes. However, some owners and tenants include the qualification in their attorneys' fees clause that the court has the option to decide who will pay fees, notes Messinger.

Model Language

In the event legal action is instituted by any party to this agreement, or arising out of the execution of this agreement, the prevailing party shall be entitled to receive from the other party a reasonable attorney fee to be determined by the court.

You can also negotiate a clause that leaves the awarding of attorneys' fees to the court's discretion if there are multiple claims in a lawsuit between you and the tenant, but you prevail on only some of them.

Model Language

Where neither party achieves a complete victory on all Lease claims, it is within the discretion of the trial court to determine which party—if either—prevailed on the contract” for the purpose of awarding attorneys' fees.

Keep Fees Reasonable

Remember that no matter how favorable to you your attorneys' fees clause is, not all provisions are legally enforceable to collect what you have spent on legal costs. In most states, courts will not award attorneys' fees if they are “unreasonable.”

That was the case in a recent lease dispute between a New Jersey owner and tenant that highlights owners' need to document—and distinguish from other costs—the exact legal fees that they incur in connection with claims against tenants, to prove that the cost is reasonable.

There, a retail shopping center owner sued its tenant, a food services company, for breaching its lease. The owner won its case and filed a motion with the court to collect attorneys' fees, which were nearly $150,000.

The attorneys' fees clause in the lease stated: “Owner may sue for and collect any amounts which may be due from time to time as Owner may elect. All legal fees and expenses incurred by Owner in enforcing its rights under this Lease shall be deemed Additional Rent and due and payable by Tenant upon demand. In the event Owner brings any summary action for dispossession of Tenant for failure to pay rent, Owner's attorney's fees and legal expenses shall be added to and included as part of the rent due and owing by Tenant with respect to the periods in default.”

The court denied the owner's request for attorneys' fees because they were “unreasonable.” Because it won the case, the owner had the burden to establish the reasonableness of the fees with regard to the lease. The owner could prove that only $4,045.35 of the $150,000 was owed for legal work directly related to the lease. The owner labeled the remainder of the amount “overall case services,” which were services on all matters within the litigation, including claims against the tenant that were not related to the lease.

The court stated that the owner was not entitled to fees because the overall case services charges were not a reasonable measure of the owner's fees for breach of the lease [Jamy Enterprises, LLC, et al. v. Lehmann, October 2009].

Always keep in mind that legal fees must be reasonable and fair under the circumstances.

Insider Source

Stephen J. Messinger, Esq.: Partner, Minden Gross LLP, 145 King St. W., Ste. 2100, Toronto, ON, M5H 4G2 Canada; (416) 369-4147; smessinger@mindengross.com.

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