How to recover attorney's fees in a commercial landlord-tenant litigation.

(The following article is the sixth in a fourteen part series which examines the standard Real Estate Board of New York form commercial lease. This series highlights particular clauses in the REBNY lease and how the courts have interpreted them.)

The first question a landlord asks his or her landlord/tenant counsel is "what are your billing rates?" The second question is "Can I recover those fees from the tenant?"

Paragraph 19 of the REBNY form office lease refers to landlord's right to recover attorneys' fees.

In older forms, this provision was often captioned "Curing Tenant's Defaults." Accordingly, under older case-law, landlords could recover only such attorneys' fees as were incurred in curing defaults - and hence was held not entitled to attorneys' fees in various other litigations with the tenant.

As discussed in Part I, the current form has evolved so as to broaden landlord's rights - but additional clarification may still be advisable. (Part I will also note that, even though the standard paragraph 19 does not limit landlord's recovery to only "reasonable" fees, the courts have read such a restriction into the lease.)

The next-to-last sentence of REBNY form paragraph 19 permits a landlord to bill its attorneys' fees as "additional rent." Part II discusses whether a commercial landlord can initiate a non-payment proceeding based on a tenant's failure to pay attorneys' fees previously billed by landlord to tenant as an additional rent charge. (Also, if the landlord commences a proceeding based on nonpayment of attorneys' fees billed as additional rent, can the landlord recover his further attorneys' fees in such a proceeding, or is such recovery barred under the general principle that one cannot recover attorneys' fees on attorneys' fees?).

Finally, Part III considers the requirement in the standard form paragraph 19 that the landlord be the "prevailing" party, in order to recover. What if, for example, the landlord prevails to the extent of 95 percent of its claim: does the fact that the tenant "prevailed" on 5 percent negate the landlord's right to attorneys' fees?

This review will reveal that the REBNY form paragraph 19, while generally effective in protecting a landlord, might well be supplemented by a clause giving landlord attorneys' fees for prevailing on any claim or defense in any action or proceeding between landlord and tenant.

What Does REBNY Lease Paragraph 19 Mean?

For what sorts of litigations can the landlord recover attorneys' fees? The current REBNY form office lease paragraph 19 provides that: "If Tenant shall default in the observance or performance of any term or covenant on Tenant's part to be observed or performed under or by virtue of any of the terms or provisions in any article of this lease, after notice if required and upon expiration of any applicable grace period if any, (except in an emergency), then, unless otherwise provided elsewhere in this lease, Owner may immediately or at any time thereafter and without notice perform the obligation of Tenant thereunder. If Owner, in connection with the foregoing or in connection with any default by Tenant in the covenant to pay rent hereunder, makes any expenditure or incurs any obligations for the payment of money, including but not limited to reasonable attorneys' fees, in instituting, prosecuting or defending any action or proceeding, and prevails in any such action or proceeding, then Tenant will reimburse Owner for such sums so paid or obligations incurred with interest and costs. The foregoing expenses incurred by reason of Tenant's default shall be deemed to be additional rent hereunder and shall be paid by Tenant to Owner within ten (10) days of rendition of any bill or statement to Tenant therefor. If Tenant's lease term shall have expired at the time of making of such expenditures or incurring of such obligations, such sums shall be recoverable by Owner, as damages.

Note that this clause does not award attorneys' fees in every case where the landlord is the prevailing party, but only in proceedings "in connection with the foregoing" or in connection with any rent default. Does "the foregoing" include the case of any default of the tenant or only cases where, after tenant's default, the owner performs the obligation of tenant? The case generally cited by tenants for the latter, narrower construction even though it does not involve the standard form language, is Frank B. Hall & Co. of New York. Inc. v. Orient Overseas Associates. There, the tenant commenced an action against the landlord seeking a declaration of its rights under an escalation clause in the lease. The landlord prevailed in that litigation. The landlord then demanded that the tenant re-pay the landlord for the legal fees incurred in connection with defending that action.

The lease there provided that "if the landlord performs an obligation 'for the account' of Tenant" then the landlord could recover legal fees incurred. The Court held that the attorneys' fees clause only applies to situations where the "tenant owes an obligation to a third party so that the landlord can perform it" on behalf of the tenant. The Court therefore determined that the tenant was not obligated to pay for landlord's legal fees incurred in the declaratory judgment action.

Frank B. Hall has been specifically distinguished, however, in favor of landlord, in cases with language closer to the REBNY form paragraph 19. Thus, in Schecter v. Carter, - a case strikingly similar to Frank B. Hall - the Court allowed a landlord to recover attorneys' fees incurred in defending (and prevailing) in an action by a tenant for a declaration of its rights under an escalation clause. In ruling for the landlord and distinguishing Frank B. Hall on the basis that the lease language before the Court was far broader than that in Frank B. Hall, the Court stated that "the only conditions precedent [under the lease] to the landlord's right of recovery of legal fees and expenses are either an actual breach of action on the landlord's part... necessary... to secure compliance by the tenant with any of the terms, covenants, conditions and agreements of the lease... Significantly, the term 'default' appears nowhere in the [relevant sections of the lease]."

See also, In re Westview 74th Street Drug Corp., where the Court held that the landlord was entitled to recover attorneys' fees resulting from a dispute over whether the tenant had assumed its lease. The Court in Westview explained that the language in the modern form was broader (in favor of landlord) than the Frank B. Hall language, stating that: "there is no requirement [under Lease paragraph 19] that the landlord perform solely for 'the account of tenant'" and that "the landlord is vested with the right to collect attorneys' fees in connection with any default by tenant in the covenant to pay rent.'"

Similarly, where a tenant holds over after the termination of its lease, it has been held that under form paragraph 19 the landlord is entitled to recover attorneys' fees incurred in connection with obtaining legal possession of the premises. Chatanow Associates, Inc. v. 527 MDN Property, Inc. See also, Cier Industries Company v. Hessen, awarding legal fees in the context of a residential holdover proceeding involving a non-primary residence under the rent stabilization laws.

Attorneys' Fees are Always Subject to Review For Reasonableness

REBNY paragraph 19 does not include any "reasonableness" limitation on the attorneys' fees recoverable. However, it has been held that attorneys' fees sought by a landlord are always subject to review for reasonableness. See, e.g. Tuttle v. Juanis. Moreover, attorneys' fee claims, while "at all times subject to supervision by the courts, are most certainly subject to special scrutiny where not between attorney and client but are imposed by contract or otherwise upon third parties..."

Can a landlord commence eviction proceedings based on a tenant's failure to pay legal fees as additional rent?

Form paragraph 19 provides that the attorneys' fees incurred by the landlord in performing any obligation of the tenant under the lease "shall be deemed to be additional rent [under the lease] and shall be paid by Tenant to Owner within ten (10) days of rendition of any bill or statement to Tenant therefor. "Accordingly, it appears that the landlord can bill a tenant for legal fees, and then, if those are not paid, enforce payment by, e.g., the usual non-payment proceeding.

The rule is different for rent-regulated tenants, and, according to one case, even for non-regulated residential cooperatives.

If landlord can thus recover attorneys' fees as additional rent in a non-payment proceeding, can the landlord then recover the attorneys' fees of that proceeding, i.e., fees on fees? The general rule is that the law does not permit an award of attorneys' fees incurred by a landlord in an attempt to recover attorneys' fees. See, e.g., One Whitehall Co. v. Wang Laboratories, Inc., supra, ("a general contract provision for the shifting of attorneys' fees does not authorize an award of fees for time spent in seeking the fees themselves.") See also, F.H. Krear & Co. v. Nineteen Named Trustees, (same). See also, Zauderer v. Barcellona, holding that "attorneys' fees incurred in proceedings to collect attorneys' fees are not recoverable."

The Courts in Whitehall and Krear both noted, however, that it is possible for parties to contract for the right to recover "fees on fees." Both Courts cautioned that any contractual provision providing for the right to recover fees on fees must contain specific language to that effect.

We have not seen any cases addressing the specific recursive problem posed above: language more specific than form paragraph 19 may, however, be advisable.

When is the Landlord Deemed to be the Prevailing Party?

As noted above, REBNY Lease paragraph 19 provides for attorneys' fees only if, among other restrictions, the owner prevails in any such action or proceeding.

If the landlord prevails entirely, then matters are clear. But what if landlord achieves something less than a total victory - can it still recover attorneys' fees to the extent, or as to particular issues as to which, it prevailed?

The case law is often confused, and is complicated by the fact that it is developed largely in the area of residential leases. In residential leases, a statute, RPL [section] 234, provides that if the landlord has a lease right to attorneys' fees, then the tenant automatically has a reciprocal right to recover such fees if it prevails. Accordingly, a court often must balance competing claims to attorneys' fees. This statute does not, however, apply in the commercial context. See, e.g., Grace Tower Realty Associates v. Damos Floral Co., Inc., which states "The implied reciprocal covenant for the recovery of attorneys' fees has no application here as this proceeding arises out of a lease for commercial property."

Looking then, cautiously, at the residential cases, the Courts appear (i) to focus on the individual causes of action, or individual defenses that are the subject of genuine contention, and then (ii) to award attorneys' fees based on which side prevailed on those particular contested issues. See, e.g., Solow v. Wellner, directing that "initial consideration [be given to] the true scope of the dispute litigated, followed by comparison of the amount actually sought by tenant, as determined by the pleadings, offers of proof or other means... with the actual recovery." See also, Murphy v. Vivian Realty Co., in which the lower court held for the tenant on four counterclaims, and awarded attorneys' fees to the tenant. On appeal, the Court dismissed two of those counterclaims, and remanded for assessment of the attorneys' fees incurred by the tenant with respect only to the two claims where it prevailed.

In Peachy v. Rosensweig, the landlord commenced a non-payment proceeding, and the tenant counterclaimed for inter alia, a breach of the warranty of habitability. The landlord was awarded over 90 percent of the rent originally sought, and the tenant was given a small abatement (less than 10 percent). The trial court held that each side should bear its own counsel fees because neither side had "prevailed." The Appellate Term affirmed.

On further appeal, however, the Appellate Division awarded attorneys' fees to the landlord, explaining: "we find that the petitioner landlord has obtained the status of a 'prevailing party' in the underlying litigation, based upon the fact that, after 10 days of trial, during which the tenants interposed 13 affirmative defenses, the landlord obtained judgment for nearly $62,000, including a possessory judgment, whereas tenants were only successful on one affirmative defense for a breach of warranty and awarded approximately $4,800..."

Accordingly, it appears that under REBNY form paragraph 19, a landlord will not be precluded from recovering legal fees merely because he does not prevail in all respects, if the tenant prevails only in relatively insignificant respects.

One final note - a trap for an unwary commercial tenant that a landlord might exploit. Even though paragraph 19 does not give the tenant a right to attorneys' fees, tenants often put in answers with a counter-claim for their own attorneys' fees. As discussed in a previous article, such a counterclaim should be severed, under the form no-counterclaim clause. In addition, however, it has been held that by asserting such a counterclaim, the tenant waives any defense of lack of personal jurisdiction.

Conclusion

On the whole, the current REBNY form paragraph 19 allows the landlord to recover attorneys' fees in a broad range of scenarios. However, landlords should consider drafting lease clauses specifically and further broadening their rights to avoid the issues and potential limitations reviewed here.