Commercial Leases, Arbitration, and Attorney Fee Awards
This post was primarily authored by Zachary B. Young, a “Rising Star” for four years running who was recently elevated to Partner at Patton Sullivan Brodehl LLP.
As a litigator, whenever I am presented with a new contract dispute, one of the first things that I do is check whether the contract contains an arbitration clause or attorney fee clause. More consistently than any others, these two types of provisions are sure to have a significant impact on litigation involving the contract. For that reason, it is critical to properly evaluate the scope of each of those provisions, if they exist.
A case recently published by California’s First Appellate District — California Union Square L.P. v. Saks & Co. LLC — highlighted this truth as the appellate court affirmed the lower court’s denial of a commercial tenant’s request for a million-dollar plus attorney fee award after an arbitration victory despite the lease containing a provision awarding fees to the prevailing party in “actions or proceedings to enforce the lease.”
California Union Square (landlord) and Saks (tenant) were parties to a commercial lease agreement, whereby Saks operated a department store in a San Francisco building owned by California Union Square. The lease provided Saks an initial 25-year lease period with the option to renew for five additional 10-year periods.
The lease provided a “Base Rent” applicable to the first 25-year period which was to be adjusted to “Fair Market Rent” for each renewal period. In the event the parties could not agree upon “Fair Market Rent,” the lease specified a procedure for determining “Fair Market Rent” which included submitting the issue to arbitration.
Under the terms of their lease, California Union Square and Saks participated in arbitration to determine the value of Fair Market Rent, which included multiple rounds of arbitration after the first arbitration award was vacated based on the first arbitrator exceeding his power under the lease. Related to those arbitration proceedings were several proceedings that occurred in the trial and appellate courts, including proceedings to appoint an arbitrator, motions to affirm and vacate the arbitration awards, and related appeals.
Ultimately Saks prevailed on the issue of determining Fair Market Rent, and the arbitrator’s award in Saks’ favor was affirmed by the trial court and on appeal. Saks, as the prevailing party, then sought a $1 million plus attorney fee award against California Union Square pursuant to the lease’s attorney fee clause.
The trial court denied Saks’ motion for attorney fees and the appellate court affirmed.
In reaching its conclusion, the appellate court dissected multiple provisions at play within the lease. On one hand, the lease contained an attorney fee provision allowing the prevailing party to obtain a fee award in “actions or proceedings to enforce the lease.” On the other hand, the arbitration section of the lease indicated that each party would be responsible for their own attorney fees related to any arbitration to determine Fair Market Rent.
Saks conceded that it was not entitled to reimbursement of its attorney fees directly incurred in the arbitration over Fair Market Rent, but argued that it should be reimbursed for its fees in connection with the related judicial proceedings to appoint an arbitrator, affirm and vacate various arbitration awards, and the related appeals. According to Saks, those proceedings were not an arbitration to determine Fair Market Rent and therefore fell under the default umbrella of proceedings to enforce the lease.
The appellate court rejected Saks’ argument and explained that the attorney fees incurred by Saks were not related to any “actions or proceedings to enforce the lease.” Neither party had alleged that the other party had done anything inconsistent with the lease. Instead, both parties followed the agreed upon procedure in the lease to participate in arbitration to set the Fair Market Rent.
Citing other cases holding that an arbitration-related attorney fee clause extends to related judicial proceedings regarding the arbitration, the court explained that in this case the judicial proceedings relating to the “Fair Market Rent” determination should similarly be controlled by the same attorney fee provision tied to the arbitration procedure itself — i.e., each side would pay its own fees. The lease’s default attorney fee clause relating to “enforcement” of the lease did not apply.
Within a contract, attorney fee clauses and arbitration provisions are powerful. It is crucial to properly diagnose the impact of each on anticipated litigation, including the limits of each and interplay between competing provisions, as in the case of California Union Square v. Saks.