Did Landlord and Tenant Orally Modify the Lease?

As many of us learned during the COVID-19 pandemic, it’s not uncommon for landlords and tenants to revise their lease terms on the fly in response to changing conditions. The general rule is that it’s okay to revise a written lease, provided that those changes are themselves put in writing. This is particularly true when, as is often the case, the lease includes a clause expressly barring oral modifications of lease terms. After all, written leases would become meaningless if parties could claim they had an oral agreement allowing them to violate the lease’s terms. On the other hand, courts sometimes do recognize the validity of subsequent oral agreements that go against the lease’s written terms. Consider the following scenario.

THE LEASE

A national company that manufactures and sells specialty accessories leases multiple properties from the same landlord. All 38 leases require the company to pay timely Minimum Rent, Percentage Rent, Additional Rent, and other charges. They also contain the following language:

There are no representations, covenants, warranties, promises, agreements, conditions or undertakings, oral or written, between Landlord and Tenant other than herein set forth. Except as herein otherwise provided, no subsequent alteration, amendment, change or addition to this Lease shall be binding upon Landlord or Tenant unless in writing and signed by them. [emphasis added]

WHAT HAPPENED

In March 2020, state and local governments around the U.S. responded to the COVID-19 outbreak by issuing orders requiring the closure of non-essential businesses and imposing restrictions on businesses.

March 18, 2020: The landlord announces that it’s closing all of its shopping centers due to the COVID-19 orders.  

June 2020: Recognizing that several of its leases were coming to an end, the landlord discusses its reopening plans with the tenant. According to the tenant, the landlord’s representative agrees to oral modifications of the lease allowing the tenant to:

• Abate its rent payments in full for April, May, and June 2020;
• Pay 15 percent of its sales as rent for July, August, September, and October; and
• Resume normal rent payments under the lease starting in November.

July 1 to Oct. 31, 2020: The tenant pays and the landlord accepts 15 percent of the tenant’s sales as rent before resuming full rent payments in November.

Jan. 29, 2021: The landlord sues the tenant for breach of lease. The tenant denies the claim and cites the alleged June 2020 oral modification agreement.   

YOU MAKE THE CALL

Did the tenant violate its rent payment obligations under the lease?

A.            Yes, because the tenant didn’t get the rent modification agreement in writing

B.            No, because the rent fairly reflected the property’s value to the tenant during the pandemic

C.            Yes, because there was no evidence the landlord agreed to the modified rent arrangement offered by its representative

D.            No, because the landlord accepted the reduced rent payments from July through October

ANSWER

D.            The tenant didn’t breach its rent obligations because the landlord accepted its reduced rent payments

EXPLANATION

This scenario, which comes from an actual Delaware case, illustrates that written leases can be modified orally even if the lease says otherwise. Like other states, Delaware has a so-called Statute of Frauds that bans oral amendments of certain written agreements, including leases with a term of more than one year. But also as in other states, contract provisions that deem oral modifications unenforceable can be waived. “Parties have a right to renounce or amend the agreement in any way they see fit and by any mode of expression they see fit,” the court explained.

Waiver of bans on oral modifications may be demonstrated by course of conduct, as long as the resulting oral modifications are “of such specificity and directness as to leave no doubt of the intention of the parties to change what they previously solemnized by formal document.” That the landlord accepted the tenant’s reduced rent payments in this case was evidence that there was, in fact, an oral modification—not enough to prove the contention, but enough to warrant a trial and reject the landlord’s motion for summary judgment [Simon Prop. Grp., L.P. v. Brighton Collectibles, LLC, 2021 Del. Super. LEXIS 715, 2021 WL 6058522].

WHY WRONG ANSWERS ARE WRONG

A is wrong because, while the tenant probably should have gotten the rent modification agreement in writing, the fact that it was oral didn’t automatically bar its enforceability. As the court noted, parties “may substitute a new oral contract without a formal abrogation of the written agreement.”

B is wrong because how much in reduced rent the tenant paid has no bearing on the question of whether there was an oral modification allowing the tenant to pay reduced rent at all.   

C is wrong because there was, in fact, evidence of the landlord’s consent to the oral modification—namely, its acceptance of the reduced rent that the tenant paid between July and October.