Is There A Limit To Waiving A Non-Waiver Clause?

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When we first wrote about the loophole in non-waiver clauses that recognizes parties can orally agree to waive such clauses even one that explicitly say that there can be no oral waivers, we got some notes expressing incredulity. After the reality set in, the notes started asking whether there were any limits to this “loophole.” We at Ruminations didn’t know how to answer until we came across a May 12, 2017 decision from the Texas Supreme Court in a case where one of the parties has this name: Boo Nathanial Bradberry. The decision can be seen by clicking: HERE. It ruled there was a limit and its reasoning makes pretty good sense.

We’ll tell a story about an attempted lease renewal, but first we need to set the context, specifically, here is the text of the non-waiver provision at issue:

All waivers must be in writing and signed by the waiving party. Landlord’s failure to enforce any provisions of this Lease or its acceptance of late installments of Rent shall not be a waiver and shall not estop Landlord from enforcing that provision or any other provision of this Lease in the future.

The story is a simple one, especially after we play a little loose with the real facts, but not in a way that makes any difference to the way the story would play out. We feel comfortable in conflating some facts because, after all, this is a Texas tale (though not a tall one).

Here, a tenant had the right to extend its lease’s term (renew it) pursuant to the following (re-construed, by us) provisions in its lease:

If Tenant has fulfilled all of the terms and conditions of the initial lease period [expiring May 31, 2007], he shall have the option as Tenant to extend the lease for an additional 5 years from June 1, 2012, through May 31, 2017 with a new rental rate tied to the Consumer Price Index (CPI) and payment of a pro-rata share of property taxes when billed by the Principal Realtor or Landlord.

If Tenant does not vacate the premises upon the expiration of the lease, occupancy converts to a month-to-month tenancy, subject to the terms of the lease and a holdover rent of $3,000 per month.

The tenant very timely sent an extension notice; it was sent 6 months ahead of the deadline for doing so. At the time the notice was sent, the rent was fully paid. That was in contrast to the tenant’s payment history. In fact, the tenant “regularly violat[ed] the lease terms by paying rent past the due date and cure period—with the extent of the deviation varying from relatively slight to significant.” Its landlord always accepted the rent without complaint, no matter how delayed payment may have been. The Texas Supreme Court, in what we think to be a pretty common sense analysis, explained that the landlord did so because it was “intent on getting paid.” Lastly, the rent for June, 2012, the first month of what would have been the extension term, was not tendered until June 13. And, what was paid was the “old” rent, and neither the CPI- adjusted rent nor the property taxes. The landlord accepted the payment.

[The new rent would have been $3,340 a month. The landlord was willing to allow this tenant to stay at $9,700.83 a month. This will explain why the parties could not resolve their dispute on their own.]

As readers will expect, the landlord’s position was that the tenant’s effort to exercise the extension option was ineffective because the tenant failed to fulfill “all of the terms and conditions of the initial lease period,” namely to make timely rent payments. The tenant didn’t argue that it had abided by the lease’s rent payment timetable. How could it? It argued that by accepting all of the late payments without objection, the landlord had waived its right to claim that the tenant had been in default. In the alternative, the tenant claimed that the landlord’s failure to object to the late payments worked an “estoppel,” especially because the landlord knew the tenant was making significant capital improvements to the leased space.

Before deciding whether the tenant benefitted from an effective waiver, the Court found that the tenant had not “fulfilled all of the terms and conditions of the initial lease period.” Regrettably, the Court was unclear about exactly what constituted that failure. We say “unclear” because we can’t tell whether the Court’s factual conclusion was based on the historical payment lateness or on the rent default that existed on what would have been the first day of the extension term. We think this is crucial and the confusion is an outgrowth of the way the lease was written. So, we’ll briefly (in Ruminations’ years) digress from our intended discussion of “waiver.”

Generally, there are three critical measuring periods when it comes to a “not in default” condition for a tenant’s extension, expansion, termination, etc. option. The Texas Supreme Court seems to have introduced a fourth and fifth. One test for a tenant’s “non-default” is the day its option is exercised. Another, for an extension option, is the last day of the expiring lease term. The third is the entire period of the lease term (up until the day the exercise notice is signed or until the effective date of the option period).

The Court seems to suggest two other measuring times: (a) the last day that the exercise notice can be sent; and (b) the first day of the extension term. We “kind of” understand (a), our thinking being that the Court could have been concerned about a tenant exercising its option so early that its actual behavior during the lease term becomes irrelevant. As to looking at the first day of the extension term, we are lost. To us, if that is a legitimate measuring point, doesn’t that mean the lease term has been extended already?

Basically, while we admire how the Court analyzed the legal question of “waiver,” we think it really didn’t understand how a lease works. Though we make that accusation, Ruminations thinks the real shortcoming falls on the parties. The lease should have been clearer. We won’t repeat our thinking about this. Instead, we direct readers to two early 2016 blog postings, seen by clicking: HERE  and HERE.

Now, back to “waiver.”

Texas is a pretty strict contractarian state. It is not very paternal. It “strongly favors freedom of contract.” Not out of laziness, but as a reflection of our admiration, we now let the Court “write” part of today’s posting. In the words of the Court:

We have repeatedly reaffirmed that competent parties “shall have the utmost liberty of contract, and that their contracts when entered into freely and voluntarily shall be held sacred and shall be enforced by Courts of justice.”

This “paramount public policy” mandates that courts “are not lightly to interfere with this freedom of contract.”

Absent compelling reasons, courts must respect and enforce the terms of a contract the parties have freely and voluntarily entered, and [a]s a rule, parties have the right to contract as they see fit as long as their agreement does not violate the law or public policy.

Given Texas’s strong public policy favoring freedom of contract, there can be no doubt that, as a general proposition, nonwaiver provisions are binding and enforceable.

Here, however, the question is not whether the nonwaiver clause in the parties’ agreement is enforceable, but whether that clause is waivable and, if so, the circumstances under which waiver may occur. We have not extensively explored this topic, but we have recognized “a broad freedom of contract” and concluded parties can contractually waive certain substantive and procedural rights.

Freedom of contract is a policy of individual self-determination; individuals can control their destiny and structure their business interactions through agreements with other competent adults of equal bargaining power, absent violation of law or public policy.

The contractual doctrine of waiver, whether express or implied, rests on a similar conceptual policy of individual self-determination — “an idea no more complicated than that any competent adult can abandon a legal right and if he does so then he has lost it forever.”

To the extent there has been any doubt up to this time, we affirm that a party’s rights under a nonwaiver provision may indeed be waived expressly or impliedly. On this point, there is much agreement. [The emphasis is ours.]

But the mere fact that a nonwaiver provision may be waived does not render the provision “wholly ineffective.” [The emphasis is ours.]

We began today’s diatribe by promising to tell about a “limit” to the oral (or unwritten) waiver of an agreement’s “waivers must be in writing” provision. Readers have been patient enough to wade through nearly 1,500 words without yet reading about that limit. So, here it is.

The tenant asserted that the landlord had waived the “not in default” requirement that was a condition for the tenant to successfully exercise its lease extension option. The Court felt that this “not in default” condition could be orally waived or waived by the landlord’s conduct or non-conduct despite the lease’s “non-waiver” provision. But, the tenant was arguing that the landlord had, by its conduct, waived the late payment defaults. Basically, the tenant was trying to leapfrog through two “non-waiver” provisions. The first one expressly dealt with rent and, to remind readers, it said:

Landlord’s failure to enforce any provisions of this Lease or its acceptance of late installments of Rent shall not be a waiver and shall not estop Landlord from enforcing that provision or any other provision of this Lease in the future.

In order to get to whether the landlord had waived the “non-default” condition to the lease extension option exercise, the landlord first would have needed to waive the rent payment defaults. Here is where the Court put its foot down. It found that the very words of the text above allowed the landlord to ignore the late payments without such conduct giving rise to a waiver. We offer the Court’s words. Read them carefully, they make sense to us but they need to be read carefully.

We agree a nonwaiver provision absolutely barring waiver in the most general of terms might be wholly ineffective. But we cannot agree that a nonwaiver provision is wholly ineffective in preventing waiver through conduct the parties explicitly agree will never give rise to waiver. Such a contract-enforcement principle would be “illogical, since the very conduct which the clause is designed to permit [without effecting a waiver would be] turned around to constitute waiver of the clause permitting [a party to engage in] the conduct [without effecting a waiver].

The many flavors in which nonwaiver provisions may present are as varied as human capacity for language and bargain, leaving us bereft of an option for specifically delineating the circumstances under which a nonwaiver agreement may be waived vel non. But we can say with certainty that accepting late rental payments could not waive the parties’ agreement that contractual rights, remedies, and obligations will not be waived on that basis, especially when the lease provides a specific method for obtaining a waiver.

If you find that confusing, focus on “the very conduct” and realize that the court is speaking about timely payment of rent. [This won’t help, but for what it’s worth, here is the legal dictionary definition of “vel non”: “Vel non is a term used by the courts in reference to the existence or nonexistence of an issue for determination; for example: “We come to the merits vel non of this appeal,” means “we come to the merits, or not, of this appeal,” and refers to the possibility that the appeal lacks merit.”]

For those who want to dig more deeply into the law (and enjoy 55 footnotes to a seven page opinion), we recommend that you read the Court’s decision for yourself. For most readers, it will be “too much information,” but for law wonks, it is a treat. There is a bonus in the Court’s decision. It addresses the effect of the landlord continuing to accept monthly payments from its tenant throughout the course of the litigation.

We’d like to add an additional practice point (beyond what readers will find in the two blog postings from 2016). It is directed to landlords. At the end of the day, waiver is a matter of intent  ̶  did the ostensibly waiving party “intend” to waive (write out) a lease’s express provision? The way to negate any thought that a landlord is waiving its tenant’s obligation to make timely rent payments and still accept these payments is by responding, each and every time, with a letter (or notice, if required by the lease) saying that you are not waiving your rights and remedies by accepting the late payment. That letter should specifically state the lease’s timely payment provision. If the lease has a late payment provision, assert it and follow-up on it. If you are going to waive the late payment charge, say that you are doing so this one time, but you are not waiving your right to demand a late payment charge in connection with future late payments.

Here’s one final observation. The lease extension period would have been from June 1, 2012 through May 31, 2017. The tenant sent its renewal notice in September of 2011. The trial court and the intermediate appellate court ruled in favor of the tenant. The case went to the Texas Supreme Court. It made its ruling in favor of the landlord on May 12, 2017, deciding that the tenant did not have the right to extend the lease’s term. That was 19 days short of what would have been the last day of the extension term. So, the tenant was able to stay in its leased premises for what would have been the entire 5- year extension term.

Granted, the tenant lost the right to further extend the lease’s term beyond that 5- year period, but the holdover rent was only $3,000 a month (not $3,240 a month) and it wasn’t obligated to pay its share of property taxes. Further, if the landlord’s “new” rent of $9,700 a month was even close to market, the landlord suffered an even greater loss.

Did the landlord miss the ball here? We think so. Perhaps it should have formally rejected the tenant’s lease extension notice and immediately gone to court for a declaratory judgment. Had it sent waiver letters each time the rent was late, it might have gotten a favorable summary judgment ruling based on there being no contestable facts. And, it certainly should re-think its lease’s holdover provision that sets a holdover rent that is an incentive to “holdover.” Even a typical statute would call for holdover rent of twice “market” rent.

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Comments

  1. Jason Kirkham says:

    I’m a bit confused. Your analysis (and the court’s) suggests a 2 step process. First, did the landlord waive the rent payment default. Second, did the landlord waive the “non-default” condition to the extension option.

    I don’t understand the need to ask the first question – e.g., whether the landlord waived the late payment default.

    Let’s assume that the landlord did not waive the late payment defaults, so that in the tenant had, at various times, defaulted by not paying rent on time. Even if that was the case, couldn’t the tenant credibly argue that the landlord had waived the requirement that, as a condition to extension, the tenant must have “fulfilled all of the terms and conditions” of the lease? Also, isn’t the court reading “timely” into the condition of the extension option? Certainly, if there was no current payment default at the time the tenant purposed to exercise its extension, then the tenant had literally “fulfilled all of the terms and conditions” even if it hadn’t done so in a timely way.

    • One key issue addressed by the court is whether the landlord by accepting many, many late payments had waived the tenant’s “default” in making on-time rent payments. Effectively, the trial court and the intermediate appellate court said, “Yes, the landlord, by its inaction, waived the default” and thus the tenant could renew the lease because it hadn’t been it default. The Texas Supreme Court reversed, saying that even though the landlord didn’t take any enforcement action when the late payments arrived, that didn’t mean it had waived the default because the lease expressly had a non-waiver provision dealing with rent saying that the landlord’s acceptance of late rent would not be the kind of action/inaction that would constitute a waiver. Thus, the landlord was under no obligation to respond to the late payments and its failure to do so did not show the necessary “intent” that would underpin a waiver.

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