Addressing a particular contractual attorney fee issue for the first time, the Appellate Division, First Department has deemed unenforceable a real estate company's lease provision directing the lessee to pay its attorney fees even when the legal action was based on the company's default.

A unanimous First Department panel wrote in its decision that “an attorneys' fees provision which provides that the tenant must pay attorneys' fees if it commences an action against the landlord based upon the default of the landlord is unconscionable and unenforceable as a penalty.”

It further noted that while the First Department “has not previously addressed whether a fee provision in a residential lease is enforceable where it provides for payment of attorneys' fees to a party even when that party is in default, motion courts addressing similar fee provisions have found them unconscionable,” citing Weidman v. Tomaselli.

The underlying legal action arose after Natalie Krodel, a tenant-shareholder in a residential cooperative building owned by Amalgamated Dwellings, was not given shares to another apartment owned by her husband that he had transferred to her in 2012, the panel said.

Krodel had paid a transfer fee, but she claimed the shares transfer did not happen. In turn, she sued Amalgamated for default of its lease agreement with her and for statutory violations, the panel wrote.

Amalgamated answered Krodel's lawsuit and counterclaimed for its attorney fees under paragraph 6(7)(c) of its proprietary lease agreement with Krodel, according to the panel. In 2014, Amalgamated then moved for summary judgment on its counterclaim, and Krodel cross-moved for dismissal of the counterclaim, arguing that paragraph 6(7)(c) was unenforceable, according to the panel.

In its Nov. 8 opinion, the panel, composed of Justices Rosalyn Richter, Sallie Manzanet-Daniels, Barbara Kapnick, Cynthia Kern and Peter Moulton, laid out the attorney fee provision at issue, from paragraph 6(7)(c). The provision stated, in part, 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 [petitioner] against the Lessor … which is based on an alleged default of the Lessor hereunder … such cost or expense shall be paid by the Lessee to the Lessor, on demand, as additional rent.”

In addressing the provision's enforceability, the justices said that to deem such a provision valid “would produce an unjust result because it would dissuade aggrieved parties from pursuing litigation and preclude tenant-shareholders from making meaningful decisions about how to vindicate their rights in legitimate instances of landlord default.”

Moreover, while noting Amalgamated's argument that New York courts regularly enforce fee-shifting provisions, the panel pointed out that whether a lease provision amounts to an unenforceable penalty “is a question of law.” The justices further wrote that “parties to a lease may contract for attorneys' fees 'provided [they are] reasonable and not in the nature of penalty or forfeiture,'” quoting 379 Madison Ave. v. Stuyvesant.

“A finding of unconscionability requires 'some showing of an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party,'” the panel also said, quoting Gillman v. Chase Manhattan Bank.

The panel's decision affirmed a 2015 ruling in the case by Manhattan Supreme Court Justice Eileen Rakower

Elliot Coz, an Anderson Kill attorney in New York, represented appellant Amalgamated in the appeal, according to the decision. He could not be immediately reached for comment.

Joseph Gehring, of Gehring & Satriale, who represented Krodel in the appeal, also could not be immediately reached.