RARE Hospitality wanted to lease a property to open a LongHorn Steakhouse, but Stirling, the property owner, would only sell it. RARE convinced HDRE to buy the property and lease it to RARE. HDRE entered into an agreement to purchase the space from Stirling for $1.3 million, and, simultaneously, HDRE and RARE entered into a 15-year lease agreement. The lease contained a fee-shifting provision, which provided that if RARE and HDRE ever had a dispute over the lease, the lower in court would pay both parties’ attorneys’ fees. 

Before Stirling sold to HDRE, RARE decided that “the numbers would work better as a purchase,” so RARE, HDRE, and Stirling renegotiated their deal. Under the revised contract (which the parties confusingly called the “Assignment”), HDRE assigned to RARE its rights and duties under the purchase agreement for a fee. Stirling consented. The Assignment gave RARE a one-week window to back out of the purchase if it could not obtain internal corporate approval The Assignment was also notable in what it did not address: It said nothing about attorneys’ fees and did not mention the lease between HDRE and RARE.

RARE executives did not approve the deal, so the company did not buy Stirling’s property. HDRE then demanded that RARE comply with its original duty to lease the property. When RARE refused, HDRE sued for breach of contract. RARE argued that the “Assignment” was really a novation, which released its duty to rent. 

A jury agreed with RARE, finding that the parties intended a novation to replace the original deal and terminate the lease. But then the court ruled that HDRE had to pay RARE’s attorneys’ fees pursuant to the fee-shifting provision -0 to the tune of $750,000. HDRE appealed, arguing that the novation had also canceled the attorneys’ fees clause. 

Questions:

1. Did the novation extinguish the attorneys’ fees provision?

2. What is a novation?

3. When the parties signed the “Assignment,” did that constitute a novation of the Lease agreement they had previously signed?

4. If the lease agreement was no longer of any force or effect, how could the prevailing party’s attorneys’ fees provision still apply?