July 02, 2008 BY Burke Noble
Georgia Supreme Court Affirms Application Of Attorney Fees Cap Commercial Leases
Many leases for commercial retail space contain “loser pays” attorney fees provisions, which enable the prevailing party in landlord/tenant litigation to collect reasonable attorney fees. Although prevailing party attorney fees provisions are generally enforceable in Georgia, there are some important limitations and “reasonable attorney fees” does not always mean “actual attorney fees.” Neither commercial landlords nor tenants should assume at the outset of litigation that the prevailing party will be able to collect all of its attorney fees, especially in disputes involving the amount of past due or future rent owed under a lease.
For example, this firm represented the commercial tenant in a recent case in which landlord prevailed on a claim regarding the amount of past due and future rent owed under a disputed exclusivity provision in the subject lease. (Hereinafter referred to as the “Cascade litigation”). The lease contained a provision permitting the prevailing party in litigation to recover all reasonable expenses, including attorney fees. After the merits of the case were decided in landlord’s favor, landlord asked to be awarded its actual attorney fees, approximately $280,000.00. However, a 4-3 majority of the Georgia Supreme Court held that the attorney fee provision was subject to O.C.G.A. § 13-1-11, which capped the attorney fees award at approximately $17,000.00.
O.C.G.A. § 13-1-11 governs the enforceability of attorney fee provisions on “notes or other evidence of indebtedness…” In order to protect debtors with unequal bargaining power and to prevent an attorney fees provision from constituting a late payment penalty, the statute caps attorney fees awards at “15% of the principal and interest owing” thereon. O.C.G.A. § 13-1-11(a)(1). This means that, even if an attorney fees provision provides for “reasonable attorney fees,” the fees awarded will be capped at 15% of the debt collected. If the provision does not provide for a specific percentage of the debt to be paid as attorney fees, the provision is construed to mean 15% of the first $500.00 of debt and 10% of the amounts above $500.00. O.C.G.A. § 13-1-11(a)(2). The statute allows an award of attorney fees only on mature, past due debt and does not permit fees to be awarded based on the collection of future, unmature debt. Eiberger v. West, 247 767, 770-771, 281 S.E. 2d 148 (1981).
Although the statute makes no explicit reference to commercial leases, since 1977 the Georgia Court of Appeals has construed the term “evidence of indebtedness” broadly to include commercial leases and ruled that the cap applies to cases in which landlords are awarded past due rent from tenants in default. Burgess v. Clairmont Properties, Inc., 141 Ga. App. 112, 232 S.E.2d 627 (1977); Holmes, et al. v. Brogino, et al., 219 App. 858, 860, 467 S.E.2d 197 (1996). However, the Court of Appeals has also ruled that the attorney fee cap does not apply to every commercial lease dispute and that actual attorney fees may be available, depending on the nature of the dispute.
For example, in Insurance Industry Consultants, Inc. v. Essex Investments, Inc., 249 Ga. App. 837, 549 S.E.2d 788 (2001), the Court of Appeals held that O.C.G.A. § 13-1-11 did not apply to a landlord’s suit to have a disputed renewal provision in a lease declared unenforceable and have the lease terminated at the end of the original five year term. Because Landlord sought no unpaid rent and sued only to enforce the terms of the lease, the lease was not “evidence of indebtedness” for the purposes of that case and actual attorney fees were available to landlord. Id.; see also Logistics International, Inc. v. RACO/Melaver, LLC, 257 Ga. App. 879, 882, 572 S.E.2d 388 (2002). Until the Cascade litigation, however, the Georgia Court of Appeals cases determining when and how the attorney fee cap applied to commercial leases had never been affirmed by the Georgia Supreme Court.
The Cascade litigation was somewhat unique in that it was neither a straightforward rent collection case, nor a case like Essex where the parties were seeking an interpretation of lease provisions unrelated to rent. The dispute centered around an exclusivity clause in the lease which permitted tenant to pay reduced rent or terminate the lease if landlord leased space to a competing merchant. Landlord leased space to a competing merchant, but, for reasons which are not essential to this article, tenant did not exercise its exclusivity rights until almost four years later. When it did exercise its exclusivity rights, tenant chose not terminate the lease and opted to pay reduced rent. In addition to informing landlord that it would pay reduced rent going forward, tenant also took a retroactive rent credit of approximately $41,000.00, representing the amount of overpaid rent that had accrued. Tenant stopped paying rent and informed landlord that it would resume reduced rental payments after the retroactive rent credit was exhausted.
Landlord filed suit, but did not seek to terminate the lease or to evict the tenant. Instead, landlord asked the court to (1) declare the exclusivity clause to be an unenforceable restrictive covenant or liquidated damages provision, and/or (2) rule that tenant had waived its exclusivity rights by sitting on them for several years. Landlord asked for tenant to repay the retroactive rent credit, pay full rent going forward, and to pay landlord’s attorney fees pursuant to the lease’s “loser pays” attorney fee provision. Tenant remained in the space throughout the litigation, and, after the retroactive rent credit was exhausted, the parties agreed that landlord could accept reduced rent payments without acceptance of such payments constituting an accord and satisfaction. As such, the amount of disputed rent continued to increase during the course of the litigation.
After motions for summary judgment at the district court and an appeal to the Eleventh Circuit, the courts ruled that the exclusivity clause was not an unenforceable restricted covenant or liquidated damages provision, but that the tenant had waived its exclusivity rights by failing to exercise them for so long. Tenant was required to pay full rent going forward and also to repay approximately $170,000.00, representing the original $41,000.00 retroactive rent credit plus additional disputed rent which had accrued during the litigation. The Eleventh Circuit also ruled that landlord was entitled to prevailing party attorney fees pursuant to the lease.
Landlord asked for its actual attorney fees incurred during the litigation, approximately $280,000.00. However, because landlord was awarded past due rent, we argued that the lease was “evidence of indebtedness” to which O.C.G.A. § 13-1-11 applied and that the statute should cap landlord’s attorney fees. If we were correct, landlord would be awarded approximately $17,000.00, far less than the $280,000 in fees actually incurred.
Landlord made several arguments as to why the cap should not apply. First, landlord contended that the Court of Appeals decisions applying the statute to commercial leases had been wrongly decided, and that the phrase “evidence of indebtedness” was intended to apply only in the commercial paper and lending context and should not be construed to include commercial leases. Even if the statute did apply to some commercial leases, landlord argued that it should only apply only to “simple” rent collection cases involving terminated leases and evicted tenants.
By contrast, landlord characterized the Cascade litigation as a “complex hybrid” case between sophisticated commercial entities involving the interpretation of an exclusivity provision in an ongoing lease. Consequently, landlord argued that the collection of past due rent was merely “incidental” and, like Essex, O.C.G.A. § 13-1-11 should not apply because the case was really about establishing the parties’ rights under the lease going forward. Landlord also argued that the attorney fees cap would defeat the purpose of a bilateral attorney fees provision that had been freely negotiated between sophisticated commercial entities. Had tenant prevailed, landlord argued, tenant would have been entitled to collect its actual attorney fees.
In response, we argued that the lease was clearly “evidence of indebtedness” under the statute, and the fact the tenant remained in the space did not distinguish our case from previous decisions. This only meant that the ruling affected the amount of future rent tenant would pay, and the case law established that no attorney fees are available on an award of future rent or debt. Regardless of the “complexity” of the parties’ dispute regarding the exclusivity clause, all of landlord’s claims were brought for the purpose of either (1) collecting past due rent or (2) ensuring that tenant would pay a higher amount of future rent. As such, the statute clearly applied to cap the landlord’s attorney fees on the claim for past due rent and prohibit the award of any fees based on the collection of future rent. Further, landlord was charged with knowledge of the effect the statute would have on the attorney fees provision in the lease, including the fact that a situation could arise where landlord’s attorney fees would be capped but tenants attorney fees would not. We argued that landlord was a sophisticated commercial business entity that should not be saved from a bargain it now regretted.
The district court ruled that the cap did not apply and awarded landlord its full attorney fees. In reliance on Essex, the court found that the case was about more than just past due rent, in part because it determined the rights of the parties under the lease and the amount of future rent tenant would pay. We appealed, and, after briefing and oral argument, the Eleventh Circuit ruled that Georgia law gave no clear answer and submitted the following certified question to the Georgia Supreme Court:
Whether O.C.G.A. § 13-1-11 applies to and limits the award of attorneys’ fees and costs in this particular case – where the landlord under a commercial lease agreement filed suit against a tenant seeking the collection of past due rent as well as a declaration of other contractual rights of the parties – and, therefore, precludes an award of full attorneys’ fees and costs as provided in the lease agreement.
A 4-3 majority of the Georgia Supreme Court answered the question in the affirmative and ruled that Plaintiff’s attorney fees award was subject to O.C.G.A. § 13-1-11. In doing so, the majority affirmed the Court of Appeal’s broad interpretation of the term “evidence of indebtedness,” holding that the term “includes all written leases which impose on the lessee an obligation to pay money.” The majority also rejected the argument that the statute should not apply because the case involved a tenant in possession and the interpretation of lease terms, holding that the statute is “applicable even though [landlord] also sought a declaration of contractual rights, and [tenant] is continuing to possess and pay rent for the leased property.”
The dissent argued strongly that the Court of Appeals decisions applying the statute to commercial leases were wrongly decided, and that the term “note or other evidence of indebtedness” had been intended to apply to commercial paper and similar loan instruments and was “never intended to include routine lease agreements.” Even if the statute did apply to ordinary past due rent cases, the dissent would have distinguished Cascade because it involved a tenant in possession and a landlord who “sued for more than just unpaid rent,” and because the attorney fees provision was part of “a negotiated bilateral agreement between sophisticated commercial entities.”
The majority rejected these arguments, finding that “nothing in the language of O.C.G.A. § 13-1-11 limits its benefits to non-commercial debtors” and that the statute applies to “all notes and other commercial paper without regard to the nature of the underlying transaction.” As such, the court held that the statute applies “at least where, as here, past due rent is recovered, and the only other relief is declaratory and governs the future enforceability or amount of the tenant’s rent obligation.”
It is difficult to forecast what impact this case will have on commercial leases in Georgia, or where the line will ultimately be drawn between the holdings of Cascade and Essex. However, the availability of actual attorney fees is obviously a critical factor in determining whether the costs of litigation will outweigh the potential benefits. Accordingly, parties to commercial leases with attorney fee provisions should always carefully consider whether the attorney fee cap could apply to their dispute before bringing suit or taking some action that could result in the other party filing suit.
Regardless, neither landlords nor tenants should jump to the conclusion that actual attorney fees are now never available in litigation in which past due rent is awarded, or in cases involving tenants in possession. Because the Essex holding remains undisturbed, actual attorney fees are still available to landlords who prevail in cases in which there is “no indebtedness involved.” The landlord in Cascade was limited to O.C.G.A. § 13-1-11 attorney fees because the only relief granted was the payment of past due and future rent, and the decision did not address what might have occurred if the case had also involved additional “non-monetary” claims to whichEssex could apply. As such, the decision leaves open the possibility that, in a true “hybrid” case, a landlord could be awarded both O.C.G.A. § 13-1-11 attorney fees for past due rent and actual attorney fees attributable to claims unrelated to rent. Many thanks to Bruce Taylor for his guidance and assistance in preparing this article.
The Journal is a publication for the clients of Drew Eckl & Farnham, LLP. It is written in a general format and is not intended to be legal advice to any specific circumstance. Legal Opinions may vary when based upon subtle factual differences. All rights reserved.
H. Michael Bagley