Can Oral Agreements Modify Lease Terms?

Q: I give some of my preferred tenants the option of renewing their leases annually, with a renegotiated monthly rent. As the end of a current lease approaches, I often sit down with a representative of the tenant to discuss rent for the upcoming year. Is there anything I should be careful of during these negotiations?

A: An important part of any negotiation is to make clear that, until both parties expressly agree to a certain term, all suggestions made are hypothetical. A savvy tenant may characterize a concession that you seem willing to make as an offer that it accepts, which could give it a legal leg to stand on if it argues that you are bound to this concession.

For example, a lease required a tenant to pay $6,500 per month. It could be renewed annually, subject to a renegotiation of the rent. When the tenant wanted to downsize its space, it met with the owner to discuss lowering its rent to $4,500 per month. Because the owner was ill, he didn’t put these changes to the lease in writing, though he did accept the checks for $4,500 thereafter.

When the owner died, his wife sued, arguing that the lease hadn't been modified, and demanded that the tenant pay back rent for the $2,000 a month difference. The tenant refused, and the owner’s estate sued for the rent deficiency.

An Ohio appeals court ruled that the parties had validly entered into a new lease for a month-to-month term at a rent of $4,500 per month. The court said that the evidence (including testimony by the owner's son) showed that the tenant had met with the owner about changing the lease, the owner was mentally sound at the time, and the owner had orally consented to the reduced rent and new term.

Also, after the meeting the tenant sent the owner's attorney a letter indicating that it and the owner had made “a verbal agreement.” And the court noted that nothing in the lease barred the parties from entering into a new lease arrangement. Rather, the lease clearly permitted the renegotiation of rent [Estate of Arnold Tollett v. Multilink, Inc., September 2006].

The lesson from this case is that allowing for leases to be modified other than in writing can get you into trouble: The lease allowed for renegotiations and modification of the lease, so an oral agreement was enough to bind the parties to new terms. Since the owner was unable to testify as to whether he agreed to the terms or not, the court was forced to rely on testimony from third parties to determine whether an agreement was made.

It can be easy for negotiating parties to mistakenly treat hypothetical trade-offs as though they are part of the lease. To protect yourself, ask you attorney how you can draft a lease that may be modified only in writing (if it can be modified at all). Also, consider bringing an attorney with you to any formal negotiations, and be sure to put any new terms or modifications into writing. Otherwise, all a court may have to go on is the testimony of others. Also, note that whether an owner will be held to an oral promise that wasn’t memorialized in the lease is very case specific. (For an example of a situation where an owner wasn’t forced to honor its oral promises, see "Is Oral Promise for Long-Term Extension Binding on Owner?" in the September 2011 issue of the Insider.)