I Win, You Pay. I Lose, You Pay. NY Court Strikes Down Unconscionable Attorneys’ Fees Clause

February 2019

In a recent unanimous decision, the State of New York Appellate Division, First Department, voided a provision in a residential lease that the court deemed “unconscionable and unenforceable as a penalty” because the tenant was required to pay the landlord’s attorneys’ fees if the tenant commenced litigation, regardless of whether the landlord was in default.

In Krodel v. Amalgamated Dwellings Inc., 166 A.D.3d 412 (N.Y. App. Div. 2018), the court indicated that “parties to a lease may contract for attorneys’ fees ‘provided [they are] reasonable and not in the nature of a penalty or forfeiture.’”  However, the court explained a contract provision will be found unconscionable and unenforceable where the terms of that provision are unreasonably favorable to one party and result in a lack of meaningful choice to the other party, taking into consideration the nature of the contract and the circumstances.

In Krodel, the tenant paid a transfer fee to the landlord, a residential co-op, so that the landlord would transfer the tenant’s husband’s shares in another apartment to the tenant.  When the landlord failed to transfer the shares, the tenant sued the landlord for default of the lease agreement.  In response, the landlord countersued for its attorneys’ fees relying on a provision in the lease stating that “if the Lessor shall incur any cost, fee or expense … including reasonable legal fees … in connection with any action or proceeding brought by the Lessee against the Lessor … which is based on an alleged default of the Lessor hereunder or which is based on any other matter or thing relating to this lease, or to any alleged failure by the Lessor to perform any act which the Lessor is required to perform … or to the shares of the Lessor issued to the Lessee, or the Lessor’s Bylaws, … such cost or expense shall be paid by the Lessee to the Lessor, on demand, as additional rent.”

The panel of judges was not persuaded by the landlord’s argument that fee-shifting provisions have regularly been enforced in New York courts.  The court explained that although this was the first time the court had decided whether an attorneys’ fee provision in a residential lease is enforceable even when the party seeking to recover the fees is in default, motion courts have struck down similar fee provisions as unconscionable.  The Court observed that awarding attorneys’ fees to a non-prevailing landlord would be an “absurd and oppressive result,” quoting East 55th St. Joint Venture v. Litchman, 469 N.Y.S.2d 1013, 1018 (Civ. Ct. 1983), aff’d, 487 N.Y.S.2d 256 (App. Term 1984).

Moreover, in reaching its decision, the court stressed that allowing the landlord to recover attorneys’ fees even when the landlord is in default would be fundamentally unfair and deprives a tenant “from making meaningful decisions about how to vindicate [its] rights in legitimate instances of landlord default.”


UPDATE: New Rules of the Game (Place)

In July 2018, we discussed a Virginia Supreme Court decision, Game Place, L.L.C. v. Fredericksburg 35, LLC, 813 S.E.2d 312 (Va. 2018), that ruled a 15-year lease was unenforceable because it did not satisfy the technical requirement of Virginia’s Statute of Conveyances, which requires a lease of more than five years to be in the form of a deed.  This decision ultimately resulted in the tenant being permitted to walk away from its long-term commitment because the lease was only enforceable as a month-to-month tenancy.  In response to this decision, we wrote: “As a result [of this case], landlords, tenants, and lenders in Virginia should review their leases that are longer than five years and confirm that they have a valid seal or permitted substitute, such as language referring to the document as ‘this deed’ or ‘this indenture’ as allowed by [Virginia law].  If not, the parties should consider entering into an amendment to satisfy these requirements and avoid having a landlord or tenant terminate the lease early.”  Due to a recent law enacted by the Virginia General Assembly in response to Game Place, this advice is no longer necessary.

Virginia House Bill 2287 and the identical Virginia Senate Bill 1422 were signed into law by the governor on February 13, 2019, and took effect immediately thanks to an emergency clause in the bills.  The bills specify that a lease conveying a non-freehold estate in land is not rendered unenforceable by the fact that the conveyance was not in the form of a deed.  Further, any lease previously executed and still in effect will not be rendered invalid because it was not in the form of a deed.  The bills also replace all references to “deed of lease” in the Virginia Code with the term “lease.”

To see the full, redlined changes to the Virginia code, click here.