'Prevailing Party' Attorneys' Fees Clauses Don't Work for Mixed Ruling Cases

Litigation is expensive, but it’s often unavoidable. Consequently, most landlords seek to ensure they can recover their legal costs if they have to take the tenant to court to enforce the lease. That’s why so many leases include a clause stating that if a lease dispute goes to court, the loser must pay the reasonable attorneys’ fees of the “prevailing party.” But “prevailing parties” clauses have a potentially costly loophole: They don’t cover the not uncommon situation where a court hands down a mixed judgment, siding with the landlord on some issues and the tenant on others.

The Context: The American Rule and Its Exceptions

In England, the rule is that the loser of a lawsuit pays the winner’s legal costs. But in the U.S., each party pays its own legal fees. This is called the “American Rule,” and it means that you get stuck with the legal bills even if you defeat a totally meritless lawsuit against you. It also means you’ve got to pay the freight even if you bring a totally just claim against somebody else. Example: If you must pay an attorney $30,000 to collect $100,000 in unpaid rent, you walk away with only $70,000 at the end of the day.

The good news is that many states make exceptions to the American Rule. One common exception, known as “fee shifting,” allows parties to a lease (or other contract) to include language stating that if disputes over the agreement go to court, the loser must pay the attorneys’ fees of the winner.

But to alter the American Rule by contract, the attorneys’ fees language must be crystal clear and unambiguous. Language that refers to the “prevailing party” may not satisfy the standard, particularly in cases involving an array of different issues.

The Simbo Case

Misplaced reliance on “prevailing party” language in a fee-shifting clause cost one Ohio landlord over $238,000. The case began when Simbo Properties leased commercial space to M8 Realty for an initial 18-month term. The lease included an attorneys’ fees provision, providing that: “If a lawsuit is filed with respect to this Lease, the prevailing party shall be entitled to collect all reasonable attorneys’ fees and costs.” Sure enough, things didn’t go as planned and Simbo took M8 to court, asserting four claims:

1.       Over $150,000 in unpaid rent;

2.       $32,000 in real estate taxes;

3.       $30,000 in property damage; and

4.       Breach of other lease provisions.

M8 also countersued Simbo for damages.

The Ohio court delivered a mixed verdict. Simbo won on counts 2 and 3, as well as on the M8 counterclaims; M8 prevailed on counts 1 and 4. Both sides then sued the other for their attorneys’ fees, claiming that they were the “prevailing party.” Much to Simbo’s dismay, the Ohio court ruled that M8 was the prevailing party because it won on claim 1. Result: It ordered Simbo to pay M8 $238,335 in attorneys’ fees.

Simbo took the case to the U.S. Court of Appeals for the Eighth Circuit. But it was to no avail. Since there was no lease definition of “prevailing party,” the court cited previous cases relying on the “main issue standard” to determine who won a case with mixed rulings. Claim 1 was the “main issue,” the court concluded, because it involved the most money and accounted for the largest percentage of the time billed by M8’s attorneys in defending.

The court also found that the “prevailing party” language didn’t allow for divvying up the costs by separate claims. “If the parties had desired to define ‘prevailing party,’ e.g., as the party that prevails on the most counts in the litigation, they could have drafted that provision into the lease. . . but chose not to do so.” Result: The clause was all or nothing, with Simbo taking nothing [Simbo Properties, Inc. v. M8 Realty, L.L.C., 2019 Ohio 3091].

How to Protect Yourself

The moral of the Simbo case is that “prevailing party” language in attorneys’ fees clauses may not produce the results you expect. That’s because it’s not always easy to determine the prevailing party in lease litigation. Accordingly, you need to either define what you mean by “prevailing party” or account for fee shifting in cases where courts hand down mixed rulings.

Model Lease Language

Attorney’s Fees. If any litigation or other court action, arbitration, or similar adjudicatory proceeding is commenced by Landlord or Tenant to enforce its rights under this Lease against the other party, all fees, costs, and expenses, including, without limitation, reasonable attorneys’ fees and court costs, incurred by the prevailing party in such litigation, action, arbitration, or proceeding shall be reimbursed by the losing party; provided, that if a party to such litigation, action, arbitration, or proceeding prevails in part, and loses in part, the court, arbitrator, or other adjudicator presiding over such litigation, action, arbitration, or proceeding shall award a reimbursement of the fees, costs, and expenses incurred by such party on an equitable basis.

The other option, of course, is to require the tenant to reimburse the attorneys’ fees and other legal costs you incur in bringing legal action to enforce the lease, regardless of actual case outcome. However, one-sided clauses raise red flags to the extent they’re seen as chilling the party on the hook for attorneys’ fees from exercising their rights to litigate. So even if you can compel a tenant to accept a provision requiring it to pay your legal fees but not the other way around, you run the risk of a court’s ruling it unconscionable or otherwise unenforceable under public policy.