California follows the standard “American Rule” for attorneys’ fees, which requires each party to a lawsuit to pay its own attorneys’ fees, unless a specific statute or contract term provides otherwise. Leases and other contracts often revise the American Rule to provide that the losing party in a lawsuit will pay the prevailing party’s fees.  These provisions have been upheld as enforceable and have become the standard in most contracts.  In rare circumstances, however, some leases go a step further and try to cap the amount of attorneys’ fees that the prevailing party may recover.  The enforceability of this type of provision was recently tested in 511 S. Park View, Inc., v. Maria Tsantis et al.

In 511 S. Park View, a landlord filed an unlawful detainer action against two tenants. The trial court resolved the action in favor of the tenants, who then filed a motion to recover attorneys’ fees as the prevailing parties. Despite a provision in the parties’ lease agreement limiting recovery of attorneys’ fees to $750.00, the tenants claimed they were entitled to recover $12,375.00 in attorneys’ fees pursuant to California Civil Code section 1717, and challenged the enforceability of the cap on attorneys’ fees contained in the lease. The trial court granted the motion for the full $12,375.00, and held that the $750.00 limitation in the lease was unenforceable. The landlord appealed.  The appellate court reversed the trial court’s decision and held that the cap on attorneys’ fees was enforceable.

Attorneys’ Fees Provision

The attorneys’ fees provision in the lease stated: “In any legal action brought by either party to enforce the terms of this Lease, the prevailing party shall be entitled to all costs, reasonably incurred in connection with that action, limited to no more than five hundred dollars ($500.00). In addition, the prevailing party is entitled to reasonable attorney fees, limited to no more than seven hundred fifty dollars ($750.00).”

The tenants claimed the $750.00 cap on attorneys’ fees was inconsistent with the clause allowing the prevailing party to collect “reasonable” attorneys’ fees. However, the appellate court determined that there was only one interpretation of the provision, and held that there was no conflict or ambiguity created by the two conditions required for the recovery of fees—that the fees be reasonable and no more than $750.00. The court also noted that by expressly agreeing to the attorneys’ fees provision in the lease, the parties had acknowledged that even fees below the $750.00 cap could be determined to be unreasonable by a trial court’s review of the hourly rate, time expended, nature and difficulty of the case, and quality of the work by the attorney.

Civil Code Section 1717

The tenants also challenged the enforceability of the limitation on attorneys’ fees in the lease by arguing that the $750.00 cap violated the trial court’s power to award reasonable attorneys’ fees under Civil Code section 1717. However, Civil Code section 1717 was enacted to ensure mutuality of remedy when a contract only makes recovery of attorneys’ fees available to one party.  For example, if a lease only provides that the landlord can recover attorneys’ fees if it prevails in a lawsuit, but does not provide a reciprocal provision allowing the tenant to recover attorneys’ fees if it prevails.  The law states that the prevailing party in any action on a contract containing an attorneys’ fees provision shall be entitled to reasonable attorneys’ fees, whether or not the prevailing party was the party specified in the contractual provision. The statute was designed to allow consumers and other parties in disadvantageous bargaining positions to enforce their contractual rights in court by granting the recovery of attorneys’ fees to the prevailing party, without considering whether the prevailing party had a contractual right to recover attorneys’ fees. The statute is an example of a situation where the California State Legislature has chosen to allow considerations of equity and fairness to prevail over the traditional rules of contract construction discussed above. In 511 S. Park View, the provision in the lease was mutual and did not restrict the award of fees to only one party.

In addition, although Civil Code section 1717 provides a remedy for parties who fall under its protection and prevail in their actions, the scope of the law is limited and does not supersede or limit the broad right of parties to make attorneys’ fees agreements under California law. Therefore, a cap on attorneys’ fees does not violate Civil Code section 1717 because, as the appellate court observed, “there is ample case law which holds that parties to a contract may limit entitlement to fees.”[1] For example, in Leamon v. Karjkiewcz, the California Court of Appeal for the Fifth District held that a prevailing homeowner in an action on a residential purchase agreement was not entitled to an award of attorneys’ fees because the agreement required both parties to seek mediation before bringing an action on the agreement.[2]In Leamon, the court ruled that the enforcement of the mediation clause as a condition precedent to recovering attorneys’ fees did not conflict with the concept of mutuality of remedy contained in Civil Code section 1717.

Thus, in 511 S. Park View, the appellate court held that the attorneys’ fees provision was not in conflict with Civil Code section 1717 because the provision provided the prevailing party (and not solely a specific party) the right to collect attorneys’ fees. Accordingly, the appellate court overturned the trial court’s ruling that the attorneys’ fees provision in the lease was void, and found that the trial court had abused its discretion in awarding attorneys’ fees in excess of the $750.00 contractual limit.