This article focuses on attorney’s fees clauses in real estate leases.  The principles here could apply to any written contract.  Often times, the negotiation of attorney’s fees and the implications of having these clause become the “Game Within The Game:”

In California, unless attorney’s fees are provided for by statute or contract, each party will absorb his/her/its litigation fees.  This becomes a consideration in whether or not to pursue litigation, or settling a claim.  To use a simple example, if it will cost a Plaintiff $50,000 of attorneys fees (plus time, etc. etc.) to recover $50,000, such that Plaintiff’s net recovery is zero, is it worth it?  Probably not.

Attorney’s fees provision change this calculation by granting the winner his/her/its attorney’s fees on top of the recovery.  For example, if it will cost you $50,000 of attorneys’ fees to recover $50,000, but there is a statutory or contractual provision for attorneys’ fees to the prevailing partythen suddenly the Plaintiff’s net recovery is $50,000.  On the other side, the Defendant’s exposure is much higher, as Defendant is now possibly paying 2x the original amount at issue.

As a Landlord when you are drafting your leases, look carefully at the attorney’s fee provision.  Residential landlords generally have more assets and more bargaining power than tenants.  Commercial landlords, aside from situations involving large national tenants (i.e. Home Depot, Walgreens, etc.), also generally have more assets and more bargaining power than their tenants.   Given this relative relationship, Landlord’s often mistakenly believe that having an attorney’s fee provision in a lease will be a deterrent to litigation.  Often times it is just the opposite.

Attorneys representing Plaintiff tenants (particularly residential tenants) typically work on a contingency basis, with the backing of an attorney’s fee provision in the event that they prevail.  This is generally the first inquiry that a contingency attorney will take in evaluating a plaintiff’s case.

Landlords often don’t consider these provisions, or if they do, they mistakenly believe that the tenant will fear the prospect of paying Landlord’s attorney’s\ fees and it will be an effective deterrent.  In the majority of cases, where there is a significant disparity between the Landlord and Tenant in terms of assets, resources and bargaining power, it is not a deterrent.  If you are Landlord with an open ended attorney’s fee provision in your leases, you are inviting Plaintiffs’ attorneys to take a “free shot” with a Plaintiff who may have a marginal case and “nothing to lose” financially.

Better practice in these situations is to include provisions that either (1) cause each party to bear the its own attorney’s fees and costs or (2) limit attorney’s fees to some reasonable amount of money.  Where the parties are more evenly matched in terms of assets and bargaining power, then this provision may serve as more of a deterrent to baseless or highly speculative litigation.

About Adishian Law Group, P.C.

Adishian Law Group is a California law firm with a statewide practice in the areas of Corporate law, Employment law, Real Estate law and Mediation Services. Adishianlaw.com is one of the oldest continually operating law firm websites on the Internet. The firm serves its clientele via three offices located in the major business hubs of El Segundo, Palo Alto and San Francisco. As of March 2013, Adishian Law Group, P.C. has represented individual and corporate clients located across 20 California counties, 4 States outside of California and 9 foreign countries — in over 340 legal matters.

For more information about this topic or to speak with Chris Adishian:

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