Commercial leases often contain attorney fee provisions allowing a party who prevails in litigation to recover attorney fees from the losing party.
Can those attorney fee provisions apply to third parties — outsiders to the lease — who get pulled into litigation between the landlord and tenant?
An opinion recently published by California’s First Appellate District — Hom v. Petrou — provides some color.
Facts: third party lenders get caught up in commercial lease dispute
Stephen Hom’s parents leased a building they owned in San Francisco to Pure Entertainment, LLC to operate a bar and restaurant. As is common, the lease included an attorney fee clause, specifying that for “any dispute” arising from the lease or the tenancy, the prevailing party would be entitled to recover attorney fees.
The lease also addressed the rights of the LLC’s potential lenders. The lease allowed the LLC to encumber its leasehold in favor of its lenders, and also listed the rights and responsibilities of a lender in that scenario.
The LLC later signed promissory notes with lenders Dennis Petrou and Brian Utter in which the LLC pledged its assets, including its leasehold, as security.
A dispute arose under the lease, and the LLC sued Hom’s parents for breach of contract. After his parents passed away, Hom became the trustee of the trust holding title to the property, and filed a cross-complaint against not only the LLC, but also nonsignatories Petrou and Utter. Hom’s cross-claims against Petrou and Utter were for tortious “interference,” asserting that they became “sham” lenders with leasehold encumbrances for the purposes of interfering with Hom’s ability to collect rent and evict the LLC.
Hom and the LLC eventually signed a settlement agreement that required Hom to dismiss the entire cross-complaint with prejudice. After the cross-complaint was dismissed, Petrou and Utter filed a motion to recover their attorney fees as “prevailing parties” under the lease’s attorney fee clause.
Trial court: Fees awarded to lenders under the lease’s attorney fee clause
The trial court granted the motion filed by Petrou and Utter, and awarded them approximately $150,000 in attorney fees.
Court of Appeal: affirmed
The Court of Appeal affirmed.
The court first recapped the legal principles governing attorney fee recovery under California law:
- A party can obtain an attorney fee award only if authorized by statute or contract.
- The parties to a contract have flexibility in structuring attorney fee provisions — e.g., attorney fee recovery can be limited to certain types of claims or to certain transactions or events.
- When a party seeks to enforce a contractual attorney fee provision relating to claims “on a contract,” Civil Code section 1717 makes the attorney fee provision “reciprocal” in two ways — first, either party may obtain fee recovery even if the contract only allows one party to recover; second, a party who defeats a contract claim by showing the contract did not apply or was not enforceable may nonetheless recover fees if the opposing party would have been entitled to fees had it prevailed.
- For claims “on a contract,” under section 1717 if an action is voluntarily dismissed or dismissed pursuant to a settlement agreement, there will be no “prevailing party” for purposes of fee recovery.
- Section 1717 does not apply to claims for fees arising from tort or other non-contract claims. For such claims, attorney fee recovery is based entirely on the language of the contractual attorney fee provision.
In the appeal, Hom did not dispute that the lease’s attorney fee clause covered non-contract claims. (The clause covered any dispute “arising from” the lease or the tenancy.) Hom also did not dispute that Petrou and Utter were “prevailing parties” in the case. (Hom’s tort claims against them were dismissed.)
Instead, Hom argued that Petrou and Utter could not recover attorney fees because of a “per se rule barring nonsignatories from collecting attorney’s fees on tort claims under a contractual fees provision.”
After examining the relevant case law, the court concluded that no such “blanket rule” existed. “[T]he relevant question is simply whether the language of the attorney’s fees provision covers nonsignatories.”
Turning to the lease at issue, the court concluded there was “little doubt that Petrou and Utter qualify as third party beneficiaries of the lease as a whole.” They were lenders to the LLC with encumbrances on the LLC’s leasehold, and the lease specified “the rights such lenders would have with respect to the lease.” As such, Petrou and Utter were entitled to the benefits of the lease.
The fee provision itself was also exceptionally broad, covering “any dispute” arising from the lease or tenancy.
Thus, Petrou and Utter were entitled to recover their attorney fees.
Third parties dragged into a commercial lease dispute might be entitled to recover attorney fees pursuant to an attorney fee provision in the lease. It all depends on the nature of the claim and the specific language of the attorney fee provision.