When Actions Speak Louder Than Words

Recently, an Ohio appellate court held that the parties' actual conduct — and not the express written provisions in their lease to the contrary — controlled in interpreting the intentions of the parties in contracting. This case serves as a good reminder for legal practitioners that our written agreements are often not the final word.

Specifically at issue in 3637 Green Rd. Co. v. Specialized Component Sales Co. was, among other matters not discussed in this article, whether the lease's no-oral-modification-provision and written-waiver provision precluded enforcement of the parties' subsequent oral agreement. See 2016 WL 4242239; 2016-Ohio-5324 (8th Dist. Cuyahoga No. 103599).

Contrary to the Writing

In 1981, the defendant/tenant and the plaintiff/landlord entered into a lease for certain warehouse and office space. The initial term of the lease was for three years, with an option to renew the lease for an additional term of three years. The lease included a holdover provision that stated if the tenant remained in possession of the premises after the term of the lease expired, the tenant would become a month-to-month tenant, subject to all the terms and conditions of the lease. The lease also contained express provisions that: 1) prohibited the parties from orally modifying the terms of the lease; and 2) required any waiver of the landlord's to be made in writing and signed by the landlord in order for it to be valid.

After multiple written lease extensions, the extended lease term finally expired. Notwithstanding such expiration, and as the landlord and tenant stipulated to the court, the tenant continued to remain in possession of the leased space as a month-to-month tenant.

At the time the month-to-month tenancy commenced, monthly rent under the last lease extension was $1,824. However, the tenant alleged that, some time in late 2003 or early 2004, the parties discussed the tenant's suffering business and, as a result of that discussion, orally agreed to reduce the monthly rent to $1,473.75. After this alleged oral agreement, the tenant made such reduced rent payments, which the landlord accepted. This continued until 2012, when the tenant vacated the premises. Thereafter, the landlord filed a complaint against the tenant alleging, among other things, that the tenant had breached its obligation to pay monthly rent by failing to pay the full amount: the $1,824 per month set out in the parties' last lease extension.

At trial, the landlord claimed that it was entitled to recover the difference between the rental amount specified in the last lease extension and the actual amount paid by the tenant. The tenant argued that the parties had agreed to a reduced rental amount and that the tenant's payment of that reduced amount constituted payment in full in accordance with the oral agreement.

In August 2015, the trial court held that the oral agreement was enforceable and, thus, did not award the landlord the claimed difference in the rental amounts.

No Oral Modification Provision

On appeal, the landlord argued that because the lease expressly prohibited oral modifications, the parties could not have orally agreed to reduce the rent and, similarly, that the provision requiring waivers be in writing “eviscerate[d]” any argument that the landlord had waived its right to the full rental payment by accepting the reduced rental amount.

The court, however, held that these provisions, like any other contract provisions, could be orally waived by a party through its actions. Here, the court noted that the landlord had acknowledged and accepted the reduced rent for at least eight years without objection. In addition, the landlord had indicated in its own records that rent had been paid in full after receiving each reduced rental payment. The court concluded that the parties' conduct demonstrated that they had “ clearly, unequivocally and decisively acted upon their oral agreement to reduce rent” and that the no-oral-modification provision and the waiver provision in the lease would not preclude enforcement of such oral agreement.

Requirement of Consideration

The landlord also argued that the parties' oral agreement to reduce rent was unenforceable because it lacked “new and distinct” consideration. The court acknowledged that an oral agreement to modify a prior written agreement must generally be supported by new and separate consideration. However, it held that the tenant had provided sufficient “new and separate” consideration for the rent reduction: The court explained that the tenant, as a month-to-month tenant, was not required to continue leasing the space from landlord. Consequently, its decision to remain on the premises and continue paying rent was sufficient “new” consideration.

The court further noted that even if the continued leasing of the space was not adequate consideration, consideration would not be required if the court's refusal to enforce the oral modification would result in “fraud to the promissee.” The court found that because there was “sufficient competent, credible evidence” supporting the existence of the oral agreement, the court's refusal to enforce the oral modification would result in fraud to the promisee (here, the tenant). It, therefore, held that the parties' oral agreement would not be deemed “unenforceable” due to lack of consideration.

Statute of Frauds

Finally, the landlord asserted that the oral agreement to reduce rent was barred by the statute of frauds, which requires certain kinds of agreements — including contracts concerning the sale of an interest in land and contracts that cannot be performed within one year of the contract being made — to be memorialized in writing.

The court agreed that the oral agreement fell under Ohio's statute of frauds, which requires leases, estates or interests in land to be in writing, and signed by the party assigning or granting it. Oh. Rev. Code § 1335.04. The court, however, explained that the equitable doctrine of partial performance can remove an oral agreement from the statute of frauds when the parties, by their conduct, unequivocally demonstrate their acceptance of new terms. In this instance, the tenant's payment of reduced rent and the landlord's acceptance of those reduced rental payments for at least eight years provided the necessary “partial performance” to except the oral agreement from the statute of frauds. The court further noted that the tenant relied on the oral modification by remaining a tenant and not finding a less expensive place to rent, thus making it “impossible or impracticable” for the court to return the parties to the status quo. Accordingly, the statute of frauds did not preclude enforcement of the parties' oral agreement.

Conclusion

In Specialized Component Sales, the landlord tried to argue that the provisions in the written lease governed, notwithstanding at least eight years of inconsistent behavior. If the landlord had not intended for the reduced rent to constitute full payment, the landlord could have rejected the rental payments or could have notified the tenant that payment had not been made in full. In the alternative, if the landlord had intended to reduce the rent for only a certain period of time, the landlord should have provided the tenant with a notice indicating that its agreement to reduce rent was only for such specified limited time.

This case reminds us that drafting a client “favorable” or “market” lease is not always enough. The lease in Specialized Component Sales was a typical commercial lease with customary provisions designed to protect the parties. The terms in the lease were not particular to the parties, but rather, boilerplate provisions we see in our everyday practice. These standard provisions, however, could not protect the landlord from its own subsequent conduct.

As practitioners, we should include in our counsel to clients the importance of acting in accordance with the terms of their agreements, and make clear to them that acting contrary to the terms of the agreement may have unintended adverse consequences.

*****
Kelly M. Gorman is an associate in the St. Louis, MO, office of Lewis Rice LLC.

Recently, an Ohio appellate court held that the parties' actual conduct — and not the express written provisions in their lease to the contrary — controlled in interpreting the intentions of the parties in contracting. This case serves as a good reminder for legal practitioners that our written agreements are often not the final word.

Specifically at issue in 3637 Green Rd. Co. v. Specialized Component Sales Co. was, among other matters not discussed in this article, whether the lease's no-oral-modification-provision and written-waiver provision precluded enforcement of the parties' subsequent oral agreement. See 2016 WL 4242239; 2016-Ohio-5324 (8th Dist. Cuyahoga No. 103599).

Contrary to the Writing

In 1981, the defendant/tenant and the plaintiff/landlord entered into a lease for certain warehouse and office space. The initial term of the lease was for three years, with an option to renew the lease for an additional term of three years. The lease included a holdover provision that stated if the tenant remained in possession of the premises after the term of the lease expired, the tenant would become a month-to-month tenant, subject to all the terms and conditions of the lease. The lease also contained express provisions that: 1) prohibited the parties from orally modifying the terms of the lease; and 2) required any waiver of the landlord's to be made in writing and signed by the landlord in order for it to be valid.

After multiple written lease extensions, the extended lease term finally expired. Notwithstanding such expiration, and as the landlord and tenant stipulated to the court, the tenant continued to remain in possession of the leased space as a month-to-month tenant.

At the time the month-to-month tenancy commenced, monthly rent under the last lease extension was $1,824. However, the tenant alleged that, some time in late 2003 or early 2004, the parties discussed the tenant's suffering business and, as a result of that discussion, orally agreed to reduce the monthly rent to $1,473.75. After this alleged oral agreement, the tenant made such reduced rent payments, which the landlord accepted. This continued until 2012, when the tenant vacated the premises. Thereafter, the landlord filed a complaint against the tenant alleging, among other things, that the tenant had breached its obligation to pay monthly rent by failing to pay the full amount: the $1,824 per month set out in the parties' last lease extension.

At trial, the landlord claimed that it was entitled to recover the difference between the rental amount specified in the last lease extension and the actual amount paid by the tenant. The tenant argued that the parties had agreed to a reduced rental amount and that the tenant's payment of that reduced amount constituted payment in full in accordance with the oral agreement.

In August 2015, the trial court held that the oral agreement was enforceable and, thus, did not award the landlord the claimed difference in the rental amounts.

No Oral Modification Provision

On appeal, the landlord argued that because the lease expressly prohibited oral modifications, the parties could not have orally agreed to reduce the rent and, similarly, that the provision requiring waivers be in writing “eviscerate[d]” any argument that the landlord had waived its right to the full rental payment by accepting the reduced rental amount.

The court, however, held that these provisions, like any other contract provisions, could be orally waived by a party through its actions. Here, the court noted that the landlord had acknowledged and accepted the reduced rent for at least eight years without objection. In addition, the landlord had indicated in its own records that rent had been paid in full after receiving each reduced rental payment. The court concluded that the parties' conduct demonstrated that they had “ clearly, unequivocally and decisively acted upon their oral agreement to reduce rent” and that the no-oral-modification provision and the waiver provision in the lease would not preclude enforcement of such oral agreement.

Requirement of Consideration

The landlord also argued that the parties' oral agreement to reduce rent was unenforceable because it lacked “new and distinct” consideration. The court acknowledged that an oral agreement to modify a prior written agreement must generally be supported by new and separate consideration. However, it held that the tenant had provided sufficient “new and separate” consideration for the rent reduction: The court explained that the tenant, as a month-to-month tenant, was not required to continue leasing the space from landlord. Consequently, its decision to remain on the premises and continue paying rent was sufficient “new” consideration.

The court further noted that even if the continued leasing of the space was not adequate consideration, consideration would not be required if the court's refusal to enforce the oral modification would result in “fraud to the promissee.” The court found that because there was “sufficient competent, credible evidence” supporting the existence of the oral agreement, the court's refusal to enforce the oral modification would result in fraud to the promisee (here, the tenant). It, therefore, held that the parties' oral agreement would not be deemed “unenforceable” due to lack of consideration.

Statute of Frauds

Finally, the landlord asserted that the oral agreement to reduce rent was barred by the statute of frauds, which requires certain kinds of agreements — including contracts concerning the sale of an interest in land and contracts that cannot be performed within one year of the contract being made — to be memorialized in writing.

The court agreed that the oral agreement fell under Ohio's statute of frauds, which requires leases, estates or interests in land to be in writing, and signed by the party assigning or granting it. Oh. Rev. Code § 1335.04. The court, however, explained that the equitable doctrine of partial performance can remove an oral agreement from the statute of frauds when the parties, by their conduct, unequivocally demonstrate their acceptance of new terms. In this instance, the tenant's payment of reduced rent and the landlord's acceptance of those reduced rental payments for at least eight years provided the necessary “partial performance” to except the oral agreement from the statute of frauds. The court further noted that the tenant relied on the oral modification by remaining a tenant and not finding a less expensive place to rent, thus making it “impossible or impracticable” for the court to return the parties to the status quo. Accordingly, the statute of frauds did not preclude enforcement of the parties' oral agreement.

Conclusion

In Specialized Component Sales, the landlord tried to argue that the provisions in the written lease governed, notwithstanding at least eight years of inconsistent behavior. If the landlord had not intended for the reduced rent to constitute full payment, the landlord could have rejected the rental payments or could have notified the tenant that payment had not been made in full. In the alternative, if the landlord had intended to reduce the rent for only a certain period of time, the landlord should have provided the tenant with a notice indicating that its agreement to reduce rent was only for such specified limited time.

This case reminds us that drafting a client “favorable” or “market” lease is not always enough. The lease in Specialized Component Sales was a typical commercial lease with customary provisions designed to protect the parties. The terms in the lease were not particular to the parties, but rather, boilerplate provisions we see in our everyday practice. These standard provisions, however, could not protect the landlord from its own subsequent conduct.

As practitioners, we should include in our counsel to clients the importance of acting in accordance with the terms of their agreements, and make clear to them that acting contrary to the terms of the agreement may have unintended adverse consequences.

*****
Kelly M. Gorman is an associate in the St. Louis, MO, office of Lewis Rice LLC.