Most commercial leases contain a provision allowing for the reimbursement of the landlord’s legal fees and costs when the tenant defaults under the terms of the lease. If the tenant does not agree, in writing, to such a reimbursement, the landlord will have a difficult time obtaining a judgment against the tenant inclusive of the reimbursement of the landlord’s legal fees and costs.

A recent decision handed down by the U.S. District Court for the Western District of Pennsylvania in Lewis v. Delp Family Powder Coatings Inc. portrays a landlord coming to grips with the realization that he cannot obtain the reimbursement of his fees and costs against his tenant in the absence of such a written contractual provision.

In Lewis , the landlord and tenant relationship was established and governed by way of an oral lease arrangement between the parties. For several years, the tenant rented the commercial property based solely upon this oral understanding.

After several years passed, an attorney representing the landlord sent a letter to the tenant demanding payment of rent due by the tenant to the landlord under the oral lease and for the tenant to sign a written lease agreement, the opinion said. In the letter, the property owner’s attorney stated that, if the tenant failed to make the payment and execute a written lease agreement with the property owner, the property owner would terminate the oral lease and the tenant would be required to vacate the property.

For several months after receiving the letter, the tenant not only disputed their obligation to pay the property owner for the alleged past due rent owed under the lease but the tenant also refused to execute a written lease agreement with the property owner, all the while continuing to occupy the property and paying rent to the property owner.

The tenant did eventually vacate the property. After that happened, the property owner inspected the property and claimed that the tenant had caused damage to the property, which the tenant disputed.

According to the opinion, because the property owner believed that the cost of repairs to the property was too high to fix, the property owner instead sold the property in “as is” condition at an alleged significant diminished value.

After doing so, the property owner filed suit against the tenant in federal court asserting claims for breach of contract, negligence, and promissory estoppel.

In the complaint, the property owner attached a proposed written lease agreement that the property owner contended the tenant should have executed. Among other things, the written lease agreement contained a provision for the reimbursement of the property owner’s legal fees and costs if the tenant defaulted under the terms of the lease.

The tenant moved for summary judgment against the property owner. One of the issues dealt with in the summary judgment motion was whether the property owner could recover his legal fees and costs against the tenant.

In Pennsylvania, courts follow the American Rule in determining whether to award legal fees and costs. According to the federal court in Lewis , “The American Rule provides that the parties to litigation are responsible for their own counsel fees, unless otherwise provided by statutory authority, agreement of the parties, or some other recognized exception.”

In the summary judgment motion, the tenant pointed out there was no evidence in the record to show that the tenant expressly contracted to pay the property owner’s legal fees and costs and that the property owner’s claims of negligence and promissory estoppel did not provide for recovery of such legal fees and costs either.

While acknowledging the limitations of the American Rule, the property owner requested that the federal court deny, or at least defer until time of trial, dismissal of his claim for the reimbursement of his attorney fees.

The property owner first relied upon a statutory basis for the award of legal fees and costs. In particular, the property owner cited to 42 Pa. Cons. Stat. Ann. § 2503 and Rule 11 of the Federal Rules of Civil Procedure: “Section 2503 is a Pennsylvania statute authorizing an award of attorney fees … as a sanction for dilatory, obdurate or vexatious conduct, and Rule 11 provides for sanctions where Rule 11(b) has been violated.”

In rejecting the property owner’s argument, the federal court in Lewis concluded that the property owner “misse[d] the mark.” The federal court noted that “the statutory provision and rule cited by [the property owner] are to be used as a sanction where either counsel or a party is found to have engaged in bad faith or dilatory conduct during the litigation” and “there is simply no allegation or evidence in the record that [the tenant] or their counsel engaged in behavior during this litigation that would justify an award of attorneys’ fees under either Section 2503 or Rule 11.”

Next, the federal court addressed the property owner’s contention that the evidence at trial may result in a finding by the triers of fact that the tenant deliberately evaded a written commercial property lease that would have included a provision for the reimbursement of his legal fees and costs.

The federal court found the property owner’s reliance on the attorney fee provision in the proposed written lease agreement attached to the complaint as misplaced. In doing so, the federal court pointed out that neither side entered into any negotiations with regard to the proposed written lease agreement, that the lease agreement was never executed, and, most importantly, that the property owner did not provide any evidence to show that the lease agreement was the one that the tenant so evaded.

According to the federal court, the property owner never disputed the tenant’s assertion that the tenant never saw the proposed written lease agreement before the litigation began.

The property owner also argued that the quantum of his attorney fees represented a consequential damage directly flowing from the tenant’s breach of contract. According to the property owner, he would not have incurred attorney fees but for the tenant’s breach of the lease and the substantial damage caused by the tenant to the property.

The federal court was not persuaded by the property owner’s attempt to recast his attorney fees as consequential damages. In the federal court’s opinion, the attempt was “unavailing and nothing more than a pedestrian attempt to circumvent the American Rule,” especially in light of “Pennsylvania appellate courts hav[ing] held that attorneys’ fees are not recoverable as consequential damages.”

Finally, the property owner argued that, because the tenant, did not move for summary judgment on his promissory estoppel claim, under which he seeks to enforce the terms of the written agreement that includes a provision for payment of his attorney fees, the issue of attorney fees can only be addressed at trial.

The federal court determined that the American Rule applied to the property owner’s promissory estoppel claim as it is essentially a claim for breach of contract and, since the property owner failed to show that an exception to the American Rule applies to his promissory estoppel claim, the mere fact that the tenant has not moved for summary judgment on his promissory estoppel claim did not preclude the federal court from granting summary judgment on the property owner’s request for attorney fees.

The federal court utilized the same rationale for dismissing the property owner’s claim for attorney fees with respect to his negligence claim as well.

LESSONS LEARNED

The federal court’s ruling in Lewis illustrates the importance, from the landlord’s perspective, of having a tenant execute a written lease agreement prior to the tenant gaining possession of the leased premises. By failing to do so, the landlord in Lewis lacked legal recourse to obtain the reimbursement of his legal fees and costs he incurred in connection with the tenant’s alleged breach of the oral lease.

The cost of doing business as a landlord is expensive enough for some landlords. As part of this calculation, landlords factor in the cost of potential litigation. If the landlord fails to include an attorney fee provision in the lease, the landlord not only forgoes the ability to collect his legal fees and costs if litigation arises, but he also loses his ability to use the potential of this reimbursement as leverage on the tenant to amicably resolve the lease dispute.

In other words, if the tenant knows he may be liable for the landlord’s legal fees and costs, the tenant may be more willing to settle the dispute without the necessity of litigation. This is something the landlord cannot afford to overlook.

Alan Nochumson is the sole shareholder of Nochumson P.C. where his law firm’s primary practice areas consist of real estate, litigation, employment and labor, land
use and zoning, and estate planning. He is also president of Bear Abstract Services where his title insurance company offers comprehensive title insurance, title examination, and closing services. He may be reached by telephone at 215-399-1346 or by e-mail at
alan.nochumson@nochumson.com.