Shift Responsibility for Attorney's Fees to Tenant
Attorney’s fees are a point of contention in many owner-tenant disputes. Typically, one party argues that the other party should pay for its own legal fees and the legal fees the first party has incurred as a result of the lawsuit or other legal proceeding. After litigating the claim or claims that are at the center of the lawsuit, you won’t want to spend more time and money addressing the additional attorney’s fees issue.
To avoid having a tenant’s request for attorney’s fees tacked onto your case, you should negotiate a favorable attorney’s fees clause. Here’s what you need to understand about this important provision and how you can draft an airtight one for your leases.
Use Standard Reciprocal Clause
An attorney’s 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 attorney’s 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.
The danger in giving your tenant a strong attorney’s fees clause is that it can later use it as leverage to discourage you from suing it over anything but extremely large disputes. That’s because you won’t want to pay steep fees for a lawyer to help you with a minor issue, even if the tenant is at fault.
Consider using a standard reciprocal clause. An attorney’s 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 isn’t being properly maintained, you must call an attorney to make a phone call or write a letter to the tenant. The best possible attorney’s fees clause would make your tenant responsible for all litigation in any situation. It’s unlikely that a tenant with any bargaining power will agree to this, but if you can convince a tenant—most likely one without any leverage—to agree to sole responsibility for fees, you can accomplish this by including the following in your lease:
Model Lease Language
In the event of litigation relating to the subject matter of this Lease, Tenant shall be responsible for its own and Owner’s attorney’s fees and costs resulting therefrom.
Your tenant may be more willing to agree on a “reciprocal” attorney’s fees clause, though. “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 attorney Stephen J. Messinger.
Under a typical reciprocal attorney’s fees clause, should a lawsuit occur, the losing party is responsible for paying all of the legal fees for both parties. Try to negotiate an attorney’s fees clause that will help you recover if your tenant is in default and you have to hire or consult with an attorney to deal with the situation or take actions, by requiring the tenant to pay for your legal costs and its own if you win your case.
Model Lease 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 attorney’s fees and costs resulting therefrom.
Practical Pointer: Be aware that if you personally write a letter to a tenant to enforce the lease, the attorney’s 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 typically use for tenants.
Limit Your Costs for Legitimate Claims
While a reciprocal attorney’s 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 attorney’s fees if your claims are “reasonable” or “equitable.” It will limit your costs for justifiable claims even if the tenant prevails:
Model Lease Language
Tenant agrees to pay all reasonable attorney’s fees for Owner’s reasonable and equitable claims against it, regardless of whether Owner or Tenant prevails on such claims.
Take Advantage of Court’s Discretion
Sometimes, as a result of bargaining power, a tenant and owner decide to purposely omit an attorney’s fees clause and let the court decide fees for disputes. However, you still can include an attorney’s fees clause that simply provides the qualification that the court has the option to decide who will pay fees, notes Messinger.
Model Lease 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 reasonable attorney’s fee to be determined by the court.
You can also negotiate a clause that leaves the awarding of attorney’s 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 Lease 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 dispute for the purpose of awarding attorney’s fees.
Keep Fees Reasonable
Remember that no matter how favorable to you your attorney’s 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 attorney’s fees if they are “unreasonable.”
You need to document—and distinguish from other costs—the exact legal fees that you incur in connection with claims against tenants, to prove that the cost is reasonable. You’ll have the burden to establish the reasonableness of the fees with regard to the lease. So make sure you don’t lump into that amount costs for legal work pertaining to claims against the tenant that aren’t related to the lease. A court is likely to decide that you’re not entitled to overall legal services charges because they’re not a reasonable measure of your fees for breach of the lease. Always keep in mind that legal fees must be reasonable and fair under the circumstances!