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Commercial leases often contain cost-shifting language specifying that if one party sues the other on the lease and loses, the losing party bears the other party’s legal costs. The intent of such cost-shifting provisions is to discourage frivolous lawsuits, and to encourage cost-avoidance on the part of both landlord and tenant by resorting to informal remedial measures in the case of legitimate disputes. When drafted appropriately, they can be highly effective tools. Cost-shifting provisions have to be carefully drafted though, or they risk becoming impotent and susceptible to crafty circumvention tactics.
If the lease shifts costs from the “winning” or “prevailing” party, the other party may make preemptive procedural maneuvers to avoid paying the other side’s costs. As one example, once the losing party realizes the case is lost, but before a judgment is entered, that party may move for voluntary dismissal. A dismissal may not meet the legal definition of a winning or prevailing party, preventing the practically victorious party from recovering its legal costs, including attorney fees. Or the party on the verge of losing may attempt to negotiate a settlement instead, with the terms of the settlement not calling for any payment or shifting of attorney fees.
To prevent outcomes like these, specific and tailored language needs to be included in the lease agreement. The lease might define what constitutes a “winning party” and impose separate cost-shifting obligations on a party that brings suits but subsequently moves to self-dismiss the action after causing the other side to incur defense expenses. The lease should also address what happens in the event of a settlement; specific shifting rules and mechanisms may be imposed, or the lease might just state that the settlement contract will address any fees including attorney fees.
Most importantly, it is never safe to assume that costs will always shift to the non-winning party based on general statements to that effect in your lease. Consult with a qualified attorney to determine the effect and sufficiency of any such language in your commercial lease agreement.