May 3, 2021

Precise Drafting of a Lease Is Crucial and Can Be the Deciding Factor in Litigation

Holland & Knight Retail and Commercial Development and Leasing Blog
Karl J. Lott
Retail and Commercial Development and Leasing Blog

Lease Drafting – Attorneys' Fees Clauses

No party enters into a lease hoping one day to end up in litigation. The parties desire a smooth, amicable landlord-tenant relationship. However, the potential for disagreements, and ultimately litigation, over a lease is very real, which is why accurately and meticulously drafting and negotiating each provision of a lease is so important – even the lackluster "Miscellaneous" provisions. The recent bankruptcy case of In re: Hawkeye Entertainment LLC, 1:19-bk-12102-MT, Jan. 29, 2021, illustrates exactly why.

In Hawkeye, the parties were disputing whether the tenant under the lease was entitled to have its attorneys' fees paid. This came down, in large part, to how the classic "Attorneys' Fees" provision was drafted. The applicable provision in the lease read:

In the event that . . . either Landlord or Tenant shall institute any action or proceeding against the other relating to the provisions of this Lease or any default hereunder, the party not prevailing in such action or proceeding shall reimburse the prevailing party for its actual attorneys' fees, and all fees, costs and expenses incurred in connection with such action or proceeding, including, without limitation, any post-judgment fees, costs or expenses incurred on any appeal or in collection of any judgment. [emphasis added]

In a 36-page holding, the U.S. Bankruptcy Court for the Central District of California dissected this provision in minute detail. The court thoroughly analyzed this seemingly simple paragraph, and this example serves as an important lesson in the value of precise, purposeful and intentional drafting.

The words "action or proceeding," and the order in which they were written, played a crucial role in the court's decision of whether or not to award the tenant its attorneys' fees. Did each of the items for which the tenant was seeking attorneys' fees equate to an action or proceeding? In answering this question, the court sought to determine the definition of the words "action" and "proceeding." It found that the term "proceeding" was broader than "action;" however, it resolved that when the general term follows the more specific term, the general words are construed to embrace only objects similar in nature to those objects enumerated by the preceding specific words. Therefore, the court found that the definition of "proceeding" is akin in nature to an action or a contested matter, and ultimately that a tribunal of some sort must be involved for an event to rise to the level of an "action or proceeding" under the lease. Notably, the court ruled that notices of default or three-day notices were not "actions or proceedings," and a party could not recover attorneys' fees based on those alone.

The phrase "action or proceeding" is still relatively broad, but the court held that the way the lease provision was drafted limited these words significantly. First, for the tenant to recover fees, there must have been action or proceeding by one party "against the other." The court interpreted this to mean that the tenant could only recover if the legal proceeding was between the two parties to the lease and not generally to a greater universe of entities or against no other party specifically (e.g., a bankruptcy action). Second, the proceeding in which the tenant could recover its attorneys' fees was further limited by the fact that the action or proceeding against the other had to relate "to the provisions of this Lease or any default" under the lease. Due to the language in the lease, the court held that in a proceeding between the parties that is not based on the terms of the lease agreement, neither party can recover attorney's fees and costs.

Finally, the court attempted to define "prevailing party." The phrase is used often, but the court held that its meaning must be understood in the context of the specific drafting of the specific contract. In making this decision, the court compared the relief awarded on the contract claim with the parties' demands on those same claims. The determination of the prevailing party is made only upon final resolution of the contract claims and only by a comparison of the extent to which each party has succeeded and failed to succeed in its contentions. The court held that prevailing in a dispute over the claimed application of the lease when the lease contains a fee provision is sufficient. In Hawkeye, the tenant was the clear prevailing party as the landlord unsuccessfully opposed all of tenant's actions. The court noted that a party who unsuccessfully asserted contract rights would have been entitled to fees if it had prevailed in establishing such rights, and therefore, that right must be mutual so as to hold that such party's ineffectiveness results in the other's success.

Each of these specific portions of the "Attorneys' Fees" provision in the lease, due to the way it was drafted, ultimately led the tenant to collect some, but not all, of the fees it was seeking . It is clear that had the provision been drafted differently, the outcome could have easily been altered. This is not to say that the provision in the lease was drafted poorly, but it goes to highlight the fact that each and every word in the lease must be carefully thought out and drafted so as to give an exact and complete picture of its intention.

This is the first article in a series on lease drafting. Attorneys from Holland & Knight's Real Estate Practice will periodically take a look at various lease clauses and discuss the factors to be considered when drafting those clauses.

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