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BLOG / 02.16.18 /

Attorney’s fees, an offer for liquidated damages and the “prevailing party” under a commercial lease dispute

Lease agreements may contain an attorneys’ fee provision whereby the “prevailing party” is entitled to recover attorney’s fees. When owner and tenant settle their disputes before trial, that provision is waived or factored into the terms of settlement. Additionally, the civil rules allow a defendant to offer a liquidated amount as damages in the event plaintiff prevails on liability (i.e., all plaintiff has to do is prove liability). If plaintiff rejects the offer and recovers an amount less than what defendant offered, the defendant is entitled to recover attorney’s fees for the damages portion of trial.

What happens if one party prevails at trial, entitling it to attorney’s fees under the lease, but is awarded damages for any amount less than what was offered pre-trial? Who is the “prevailing party”? The New York County Supreme Court faced this query in Free People of PA LLC. v. Delsha 60 Ninth LLC. (Sup. Ct. NY Cty. 11/29/17).

Tenant and owner entered into a commercial lease requiring the owner to deliver the premises by a date certain. Delivery was delayed for 825 days and the tenant demanded a rent credit of $3,000,000.00. Before trial, the owner made two timely offers to settle at $1 million and $1.5 million, which tenant rejected. At trial, the tenant was awarded $650,000.00 in damages, far less than the liquidated damages offered by the owner.

The Court first determined that neither side “prevailed” as that term was used in the commercial lease where: (1) the tenant was awarded damages of an amount far less than what it pursued through trial but (2) owner nevertheless did cause damages resulting from the delay in delivering possession. Because neither party in “any practical sense” was the “prevailing party” where the tenant engaged in “unnecessarily expensive litigation”, the Court said the lease provision was unenforceable. However, because the owner had made a proper offer of liquidated damages of a greater amount than what tenant ultimately was awarded, owner was entitled to recover attorney’s fees for the damages portion of trial.

This was no small fee. Liability was a nominal issue such that the measure of damages consumed the bulk of legal work after the liquidated damages offers were made. Owner was entitled to reimbursement of costs and attorneys’ fees of $154,919.17, apparently caused by the tenant’s unrealistic or inflated expectations of recovery.

Owners (and tenants) should not assume the “prevailing party” language in a lease to be the beginning and end of analysis regarding the recovery of costs and attorneys’ fees. Moreover, the civil rules provide a valuable tool, when used, to buttress and counter a provision in the lease permitting recovery of attorney’s fees.