Right To Recover Attorney’s Fees Called Into Question
A recent case has caused some concern among boards, managing agents, and attorneys about whether the typical attorney’s fees clauses in proprietary leases remain enforceable. These clauses commonly provide that a board may recover fees from a shareholder or unit owner if it brings an action to enforce the proprietary lease or condominium by-laws, or defends a counterclaim in such an action.
Most proprietary leases and condominium by-laws allow for the recovery of attorney’s fees in litigation with a shareholder or unit owner. However, in order to recover attorney’s fees the courts have required that the cooperative/condominium be the prevailing party in the litigation to recover.
In a recent case, the court faced an unusual clause requiring a prevailing shareholder to pay a losing cooperative’s attorney’s fees even if the shareholder was successful in an action against the cooperative based upon the default of the cooperative. The court held that the clause would have a chilling effect on a shareholder’s right to start a lawsuit, and so was unconscionable and unenforceable. This caused some concern that even the typical attorney’s fees clauses in proprietary leases might now be held unenforceable.
These typical clauses commonly provide that a board may recover fees from a shareholder or unit owner if the board brings an action to enforce the proprietary lease or condominium by-laws, or defends a counterclaim in such an action. Since such clauses only apply to actions or counterclaims brought by the cooperative based on the shareholder’s default, such clauses could not be said to dissuade an aggrieved shareholder from affirmatively enforcing its rights. In addition, the courts have uniformly required that the cooperative or condominium must be the prevailing party in the litigation in order to recover fees. For these reasons, it does not appear that the reasoning of the court in the recent case is likely to be applied to prevent the implementation of standard attorney’s fees clauses.
However, we advise boards to review their attorney’s fees clauses to make sure that they will pass muster under the recent decision.