Let’s NOT Do the Waive

July 2017

Many leases and other contracts often contain provisions stating that the parties cannot modify their agreement orally, and that any modifications must be in writing. The enforceability of these “no oral modification” clauses depends on a few factors. Most notably, these clauses can be waived when the party benefited by the clause acts inconsistently with its terms. This raises a question about how the parties can protect themselves from unintentionally waiving the protection of these clauses through their actions. The answer lies in including anti-waiver or “no oral waiver” clauses in the contract. A “no oral waiver” clause requires all waivers of contractual rights and obligations to be in writing—i.e., you can’t waive a right or obligation through your conduct alone. However, the underlying vulnerability present in a “no oral modification” clause is also present in a “no oral waiver” clause.

So how do parties avoid waiving their anti-waiver provisions? A 2017 Texas Supreme Court decision, Shields Limited Partnership v. Bradberry, suggests that the key to avoiding waiver is to be specific in the anti-waiver provision. The Shields case involves a dispute between a landlord, Shields LP, and one of its tenants, the San Francisco Rose restaurant in Dallas, Texas. The lease provided the tenant with an option to extend the term of the lease so long as the tenant always paid its rent on time. The tenant regularly failed to pay its rent on time but tried to exercise its option anyway. The crux of the dispute is whether the landlord’s acceptance of the tenant’s late rent payments waived landlord’s right to enforce the option provision, despite the fact that the parties had agreed in the anti-waiver provision that the landlord’s rights could not be waived by accepting late payments and that all waivers must be in writing and signed by the party waiving the right.

The Texas Supreme Court held that while a general prohibition on oral waivers could itself be waived by a variety of factual scenarios, a specific prohibition explicitly excluding certain actions as a basis for waiver can protect a right, remedy, or obligation from being waived when the party engages in that specifically excluded act. Because the tenant was required to make all rent payments on time in order to exercise the option, and landlord had not waived its right to enforce the option provision by accepting the late rent payments, the tenant’s attempt to exercise its option failed. The take away from this case is that an anti-waiver provision that delineates specific actions and negates them as bases for waiver is more likely to be upheld by a court than a general anti-waiver provision that can be waived by a variety of actions because it mentions none with enough specificity to protect the party. But the balance between being specific and overly broad is a delicate one. A 2011 California case, Gould v. Corinthian Colleges, Inc. tells a cautionary tale about an overly specific anti-waiver clause in a commercial lease.

In Gould, the dispute turns on an early termination right granted to the tenant in the lease. As a condition to exercising that right the tenant was required to pay the landlord $136,500 upon delivery of the termination notice. The tenant exercised its early termination right under the lease but did not deliver the full termination payment at the time. Instead, the tenant delivered a check for $120,057.10, with the remaining $16,442.90 to come from the security deposit. The lease agreement prohibited the tenant from applying the security deposit to any payment to be paid by tenant under the lease. The landlord kept the $120,057.10 and filed an action for declaratory relief seeking a judgment declaring that the tenant had not exercised their right of early termination. The court found that tenant had substantially complied with the early termination provision and that the landlord had waived any remedies for noncompliance by keeping the early termination payment. The landlord argued that, per the anti-waiver provision, “acceptance of a payment which is less than the amount then due shall not be a waiver of Lessor’s rights to the balance of such Rent.” The court recognized that, though the presence of such an anti-waiver provision would normally “militate against finding a waiver in most circumstances,” in the present case, the anti-waiver provision was overly specific and the termination payment did not fall within the scope “Rent” as defined in the lease.” Because the anti-waiver provision limited landlord’s right to receive insufficient payments to receiving insufficient rent payments, landlord’s acceptance of the insufficient termination payment constituted a waiver. The court also seemed to imply that even if the anti-waiver provision did include a right to accept insufficient termination payments without limiting the landlord’s remedies and enforcement rights, the court might not enforce it because allowing the landlord to keep the $120,057.10 yet not terminate because the landlord chose not to apply the remaining $16,442.90 from the security deposit to the termination fee would be unconscionable.

Ultimately, drafting “no oral modification” and “no oral waiver” clauses requires careful consideration. These two cases show that drafting overbroad clauses may provide no protections at all, and drafting overly specific clauses may exclude protections the parties intended to secure. The key is to strike the right balance.