Are Oral Modifications of Written Leases Enforceable in Ohio?

As you may know, as a general rule, commercial leases of real property in Ohio must be in writing to be enforceable. Ohio’s “Statute of Frauds” (ORC Section 1335.04) with respect to leases provides in pertinent part that “no lease… of, in, or out of lands, tenements or hereditaments… shall be granted, except…in writing, signed by the party …granting it”. Ohio’s Landlord and Tenant Act (ORC Section 5321, et. seq.) supersedes the foregoing Statute of Frauds rule with regard to residential leases.

Commercial leases of real property in Ohio must also be properly acknowledged (e.g. notarized). ORC Section 5301.01 provides that leases of non-residential real property whose terms exceed three (3) years must be in writing, signed and notarized (or otherwise acknowledged as provided in ORC Section 5301.01) to be enforceable.

What about modifications/amendments to written commercial leases? Must they be in writing to be enforceable? What if there is a clause in the written lease precluding oral modifications of the lease; does that end the inquiry?

The recent Eighth Appellate District Court of Ohio case, 3637 Green Rd. Co., Ltd. v. Specialized Component Sales Co., Inc., 2016-Ohio-5324, presents a good summary of the law in this regard.

The facts of the case are as follows: On April 17, 1981, 3637 Green Road (“landlord”) and Specialized Component Sales (“tenant”), a distributor of industrial electrical components, entered into a lease for warehouse and office space at 3637 Green Road in Beachwood, Ohio. The original lease was for a term of three years (beginning in 1981), with an option to renew the lease for another three year term. The parties executed six written extensions to the original lease. After the expiration of the final, written lease extension, the tenant remained in possession of the premises on a month to month basis for eight years.

The business issue between the parties was, of course, money. The rent during the fifth extension term was $1,824.00/month (the rent for the original term was $1600.00/mo.). The tenant’s principal testified that around late 2003 or early 2004, he had a discussion with the landlord’s representative claiming that business was bad, and accordingly, the tenant would  have to reduce rent or move out. As a result of this discussion (according to the tenant), the monthly rent was reduced to $1,473.75/mo. but no written agreement was executed confirming the rent reduction. Tenant paid this amount for approximately eight years (from 2004-2012) and landlord accepted same without objection. While the exact termination date is in dispute, the tenant vacated the premises in November 2012, after the landlord stated the rent would need to increase by $1800/month (if tenant wanted to stay) because landlord had located a new tenant.  The tenant turned in its keys in the first part of December, 2013, but the landlord claimed it had no notice of the vacation of the premises until March, 2013.

Thereafter, the landlord sued the tenant claiming it was entitled to recover “(1) the difference between the $1,824 monthly rent specified in the fifth lease extension and the $1,473.75 month rent paid by tenant from January, 2011 through October, 2012 and (2) $1,824 in monthly rent for November 2012 through March 2013”, as limited by the court’s $15,000 jurisdictional limit. In response, the tenant asserted that it had paid all the rent due through October 2012 and that the security deposit covered the November 2012 rent.

In August, 2015, the trial court awarded the landlord $1,196.50 in damages, finding that: 1) the parties had orally agreed to reduce the monthly rent due under the lease to $1,473.75, 2) the landlord terminated the month-to-month tenancy as of October 31, 2012, and 3) the tenant vacated the premises on December 3, 2012 when it turned in the keys for the premises. Based on these findings, the court concluded that the tenant owed rent for the months of November and December 2012 (totaling $2,947.50) which, when offset by its $1,751 security deposit, resulted in a net damages award of $1,196.50 to the landlord.

Among the “assignments of error” (claimed mistakes by the trial court) claimed by the landlord at the Cuyahoga County Court of Appeals were: 1)  the trial court erred in upholding a verbal modification of a written lease, barred by the Statute of Frauds; and 2) the trial court erred in failing to enforce a no-oral-modification provision. As to the landlord’s argument that the parties’ oral agreement to reduce the rent was barred by the Statute of Frauds, the court did acknowledge that “a modification or reduction of the rent stated in a written lease cannot generally be proven by evidence of an oral agreement based on the Statute of Frauds.” In fact, the court in 3637 Green Rd. cited several cases subscribing to this general rule.

As with most case law, however, there are exceptions to the “general rule”. The principal exception to the Statute of Frauds is the equitable doctrine of “part performance” (which is not particular solely to leases). This doctrine basically dictates (based upon fairness/equity) that a lease (or other contract) should not be rendered unenforceable due to technical failures or oral modifications when much of the contract has been performed.

The 3637 Green Rd. court cited a number of cases that have established the following “test” to determine whether or not partial performance is sufficient to remove an agreement from the operation of the Statute of Frauds: 1) the performance “must consist of unequivocal acts by the party relying upon the agreement which are exclusively referable to the agreement”; and 2) the party asserting partial performance must have undertaken acts that “changed his position to his detriment which makes it impossible or impractical to place the parties in status quo.”

Applying the law to the facts, the 3637 Green Rd. court easily determined that eight years of lower rent payments without objection from the landlord were clearly “unequivocal acts”. Not only did the landlord not object, but in an October 17, 2012 financial statement attached to the landlord’s complaint, the landlord, in effect “stated” that  no additional amounts were due by virtue of showing a zero balance in tenant’s rent due account.

The landlord also argued that the lease itself  prohibited oral modifications. Section 24 of the lease states, in pertinent part: “No waiver of any … condition or covenant shall be valid unless it be in writing signed by Lessor,” and Section 42 of the lease provides, in pertinent part: “This Lease contains the entire agreement between the parties, and any other agreement hereafter made shall be ineffective to change, modify or discharge it … unless in writing and signed by the party against whom enforcement …. is sought.”

Clearly, the parties specified in the lease that modifications and waivers were not to be enforceable unless set forth in a signed writing. Additionally, there is a “boat load” of case law that provides if the language of a lease (or other contract) is clear and unambiguous, courts must enforce the instrument as written. So, case closed/trial court judgment overruled (in favor of the landlord); correct?

Not so fast. While the appellate court in 3637 Green Rd. did recognize the general law that provides, in effect that the written word, “rules”, it also recognized that there are exceptions to this basic principle of contract law as well. Citing precedent (prior case law on point), the court in 3637 Green Rd  summarized the law in this regard as follows: “If the language of a lease is clear and unambiguous, courts must enforce the instrument as written… However, waiver of a contract term can occur when a party conducts itself in a manner inconsistent with an intention to insist on that term… [and] a no-oral-modification clause can be waived by oral agreement like any other term in a contract.” The court of appeals in 3637 Green Rd. clarified, however, that the waiver must be “clear and unequivocal if it contradicts a written contract provision.” In other words, the same test to determine if partial performance is sufficient to remove an agreement from the operation of the Statute of Frauds can used to determine if a no-oral waiver provision can be waived by unwritten words/actions. According to the court, one could not be much clearer than payment of eight years of a reduced rent, without objection from a landlord, plus a landlord’s accounting entry showing a zero rent balance for the tenant.

While the court in 3637 Green Rd doesn’t present a bright line test as to what is clear and unequivocal, it did cite a couple of examples. One case cited on similar facts as 3637 Green Rd (EAC Properties, LLC v. Brightwell, 2011-Ohio-2373) involved a reduced rent being paid, without objection for thirteen months. Another case cited (200 West Apartments v. Foreman, 8th Dist. 1994 Ohio App. LEXIS 4081) wasn’t as much concerned with the duration of the waiver, but by the detrimental reliance of one party upon the waiver. In the 200 West Apartments case, the written lease was orally modified by the acts of the parties when landlord agreed to accept half the rent in exchange for services provided by tenant.

 3637 Green Rd. is a good example of a court applying principles of equity and fundamental fairness instead of the application of “black letter law” which would otherwise result in an unjust decision, As aptly explained by the 12th District Court of Appeals of Ohio (in Fields Excavating, Inc. v. McWane, Inc., 2009-Ohio-5925)if such [no oral modifications] clauses are rigidly enforced, then a party could simply insert the clause into an agreement and would be magically protected in the future no matter what that party said or did. More simply, by including a no-oral-modification clause in a contract, a party could orally induce the opposing party in any way and then hide behind the clause as a defense.”

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