Facts: A tenant enters into a lease agreement. The lease agreement contains an attorney fee provision stating the prevailing party in any action arising out of the tenancy granted by the agreement is entitled to attorney fees. The tenant sustains an injury in a common area of the property due to the landlord’s negligent maintenance. The tenant sues and is awarded a money judgment against the landlord to recover losses incurred due to the injury.

Claim: The tenant now seeks to recover the attorney fees they incurred in pursuing their claim to judgment, claiming their injury, and thus their judgment award, were the result of their tenancy in the property and costs of the litigation are governed by the attorney fee provision in the lease agreement.

Counterclaim: The landlord rejects the tenant’s claim for attorney fees, arguing the tenant’s injuries were not a result of the landlord’s breach of the lease agreement contract and thus cannot be governed by its attorney fee provision.

Holding: A California Court of Appeals holds the tenant is entitled to their attorney fees since the tenant’s injury arose out of their tenancy and the wording of the attorney fee provision in the lease agreement referenced that claim without limiting recovery of attorney fees to actions on the lease agreement contract. [Hemphill v. Wright Family, LLC (2015) 234 CA4th 911]

The inherent risk and blanket application of attorney fees provisions

The lease agreement entered into between the landlord and the tenant in the above Hemphill v. Wright Family case contained a broadly worded, dragnet-type attorney fee provision. The provision, in part, states:

“[in]any action aris[ing] out of the Homeowner’s tenancy, this Agreement, or the provisions of the Mobilehome Residency Law, the prevailing party or parties shall be entitled to recover reasonable expenses, including without limitation attorney fees and costs.”

Editor’s note — In Hemphill, the tenant owned a mobilehome and leased ground space on which to park and occupy it.

The Hemphill action was a tort claim — not a contract claim — against the landlord to recover losses incurred due to injuries the tenant sustained in the common area of the park maintained by the landlord. The tenant’s injury did not occur due to the landlord’s breach of the lease agreement provision.

However, the attorney fee provision in the lease agreement referenced claims arising out of the tenancy — not just those for breach of the leasing contract. Thus, the provision’s reference to the tenancy triggered application of the attorney fee provision to the litigation and judgment to recover for the injury incurred. The injury rose out of the tenant’s use of rights granted by the landlord on conveyance of the tenancy to the tenant.

The broad wording of the attorney fee provision drafted into the lease agreement unambiguously provides for an award of attorney fees to the prevailing party in a lawsuit resulting from, among other things, the tenancy. Since the tenant had access to the common area of the rental property as part of their tenancy, their injuries and subsequent tort claim arose out of the tenancy itself, not out of the landlord’s breach (the loss on the breach would have been the cost to perform the promise to maintain the property).

Attorney fee provisions in transaction agreements carry very serious implications for real estate brokers. Brokers occasionally end up entangled in litigation between buyers and sellers, landlords and tenants or lenders and borrowers. The primary culprit is the encouragement of an attorney fee provision inducing someone to file suit, not settle.

Attorney fees provisions encourage litigation

Tort claims such as those in Hemphill tend to be the territory of tenants (or, in the case of listing agreements, clients on agency claims). The logic goes: you did something wrong, I was harmed by it and thus I want money in kind as the remedy because of the special relationship.

By contrast, claims to enforce the terms of an agreement, such as a listing or lease agreement, are typically the domain of brokers and landlords. They seek money due them on the contract that has gone unpaid. Here, the broker’s or landlord’s thinking is: you (client or tenant) agreed to specific terms, so you need to perform as agreed.

No tort — negligence — claim is involved when the broker or landlord is suing to collect money. Thus, their claims for money arise only under the contract. Not so for the other party involved; the client or tenant typically will be suing on a tort or agency theory for losses due to injuries arising out the broker’s or landlord’s conduct, not to enforce some provision in the listing or lease contract.

Those who tend to benefit most from an attorney fees provision include:

  • landlords in lease agreements;
  • lenders in promissory notes;
  • brokers in listing agreements; and
  • attorneys, as a class — as they provide the service generating the fees.

These classes of litigants seek enforcement of a contract in the form of a lease agreement, note or listing agreement. Likewise, they are the ones most likely to be entitled to attorney fees under an attorney fees provision to cover litigation expenses. Thus, they get attorney fees if they win, or the person sued gets attorney fees for successfully defending against enforcement of the contract.

With the inclusion of any type of attorney fee provision, litigation becomes a predestined eventuality. The economic barriers to filing suit all but vanish for litigants who think they have a good chance of winning (and both sides nearly always do). For these litigants, the potential award is not diminished by the prospect of losing most or all of it to pay the lawyers.

As in Hemphill, the probability of litigation becomes aggravated by an attorney fee provision which covers situations beyond the landlord’s enforcement of the contract.

In contrast, the landlord rarely, if ever, is in a position to sue a tenant for inflicting personal injury on the landlord. So why include such a broadly-worded, all-inclusive attorney fees provision which, in its coverage of extended situations, will impose liability on the landlord almost exclusively in its enlarged application?

A limited attorney fees provision protects the landlord

Attorney fees provisions do have their place in a healthy real estate market. The choice of the wording depends on:

  • the biases of those who draft or select the form to memorialize an agreement;
  • the likely type of litigation the agreement might generate; and
  • who will most likely prevail.

As a broker or agent, it helps to understand the application of attorney fee provisions encased in the agreements your broker uses — both for your client and for yourself. The concern of brokers in transactions is risk mitigation by taking all reasonable steps to avoid litigation. The attorney fee provision is part of this consideration, as is compulsory mediation.

Lease agreement forms published by first tuesday have always contained the following attorney fee provision:

In any action to enforce this agreement, the prevailing party will receive attorney fees. [See ft Form 550 §7.5]

Aside from engineered brevity and clarity of purpose, the key difference between this attorney fee provision and the Hemphill provision lies in its limitation to actions to enforce this agreement. This automatically limits an award of attorney fees to claims filed to enforce aspects of the lease agreement itself — claims almost always brought and most frequently won by the landlord. Compare with the precision of a scalpel to the thrashing of a hatchet. In a case like Hemphill, this boundary on application would have protected the landlord from owing attorney fees on a claim unrelated to any enforcement of the terms of the lease agreement.

In purchase agreement circumstances, attorney fees provisions are best excluded altogether for reasons of risk mitigation. This exclusion dissuades litigation over scrapes that develop between buyers and sellers, which as a matter of routine will name the brokers and agents involved.

Without the attorney fees provision, most potential litigation is rendered economically infeasible to pursue, and is settled instead. Thus, a broker’s risk of becoming entangled in litigation between buyers and sellers is greatly reduced. [See first tuesday Form 150]

To balance the discouragement of litigation created by the absence of an attorney fees provision, a mediation provision is most preferable. Mediation fosters low-cost, low-consequence dispute resolution by a moderated mutual settlement agreement. Agreements containing mediation provisions intuitively eliminate the “need” for an attorney fees provision for no attorney is involved in mediation — other than possibly the mediator.

Further, requiring each party to bear their own court costs when no attorney fee provision is involved discourages complainants from escalating the dispute beyond mediation to full-blown litigation.

In leasing agreement situations — like that in Hemphill — and listing agreements, it isn’t advisable to exclude an attorney fees provision entirely. Under a lease agreement, it is rare the tenant prevails. It is almost always the landlord who is suing the tenant, and the usual claim is for unpaid rent or other amounts due the landlord under the terms of the lease agreement. The same conditions exist for brokers on employment agreements – listings with owners, buyers and tenants.

Thus, an attorney fee provision for recovering costs of litigation to enforce the monetary terms of the lease agreement is proper, if not warranted.

Read the text of the case here.