Daily Development for Monday, September 8, 2008
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri

LANDLORD/TENANT; DEFAULT; NON WAIVER CLAUSE; RENEWAL: A landlord may not rely on a no waiver provision in a lease to enforce a tenant's past defaults after acquiescing to those defaults through a lease renewal.

Rehoboth Mall Limited Partnership v. NPC International, Inc., No. 419, 2007,   2008 WESTLAW 2600980 (Del. App. 7/2/08) (not yet released for publication).

In 1984, a Pizza Hut franchise entered into a ground lease with Rehoboth Mall Limited Partnership ("RMLP") for a term of fifteen years. The lease provided the tenant with an option to extend the lease for seven successive renewal periods of five years each. In 1997, Pizza Hut assigned its interest to NPC. In 1998, NPC made four late rent payments, and in 2000, a propane leak was found at the premises in violation of state law. The late payments and the propane leak were defaults under the lease.

At the end of the fifteen year original term, NPC notified RMLP that NPC was exercising its renewal option, and RMLP did not object. No defaults occurred during the first renewal term from 2001 to 2006. In November 2005, NPC again notified RMLP of its desire to exercise the renewal option, but RMLP objected, citing the defaults in 1998 and 2000.

Under the lease's renewal option, "Provided Lessee is not in default at any time during the term of this lease, Lessee shall have the right and option to extend the term of this Lease . . . ."

The no waiver provision in the lease provided that "[f]ailure of the Landlord to insist upon the strict performance of any provision of this Lease . . . shall not be construed as a waiver for the future of any such provision . . . ."

The trial court held that the first renewal period created a new lease and that only defaults occurring under the new lease could be considered when deciding whether NPC could exercise the second renewal option. The trial court also ruled that RMLP could not use the no waiver provision to resurrect prior defaults.

The Delaware Supreme Court found that the renewal did not create a new lease. The intent of the parties evidenced by the language in the lease controlled. Since the lease provided that all rights and obligations from the original lease continued after renewal (except for an adjustment of rent) and renewal automatically extended the term of the lease without the execution of a new lease, the court concluded that the original lease continued without the creation of a new lease.

The court nevertheless found in favor of tenant NPC, however.  It appears to state (in its opening paragraph) that the landlord waived the right to refuse an extension under the clause for the second extension period when it failed to invoke it for the first.

As to the “no waiver” clause, the court stated that no waiver provisions generally protect a waiving party by providing that individual waivers of certain rights will not operate as permanent waivers. RMLP asserted that the no waiver provision not only protected a lessor prospectively but also allowed the landlord to require strict performance of past defaults already waived.  But court noted that the express language of the no waiver provision in the lease provided that RMLP's failure to insist upon strict performance would not be construed as a waiver "for the future," rejecting RMLP's contention.

Finally, the landlord argued that as a matter of fact there could be no waiver where the landlord in fact had no intent to grant a waiver and its failure to deny the first extension was a “mere oversight.”   the court held that even if RMLP meant to object to the first renewal and failed to do so because of an oversight, the fact that RMLP took rent payments and allowed NPC to maintain possession for five years constituted a waiver of the no default requirement as a matter of law.

Comment 1: Of course, courts should enforce contract language in commercial leases voluntarily accepted as a bargain by landlord and tenant.  The language here was quite explicit - if tenant has defaulted - no extension rights.  Thus the court had to do a little tap dance here to conclude that the “non extension” clause for the first term did not apply to the second renewal term.  Literally, the “life of the lease” ought to include the initial terms and any extensions.  So the court clearly was stretching the language to bail out the tenant here.  But, on the other hand, the evidence of waiver, by most standards, was very clear.

Comment 2:  This area is discussed generally in Friedman on Leases (Randolph edition) at Section 14.1.1.  Generally, the treatise reveals, the cases are split on whether a landlord’s acceptance of rent following tenant default is a waiver of the requirement that a tenant be “in good standing” in order to effect a renewal or extension. 

Generally, the better rule is that if the defaults have been cured and the landlord has thereafter accepted rent, the landlord should not be able to invoke a clause that denies extension or renewal rights on the basis of tenant default without complaint or reservation of rights absent very clear language - clearer than “in good standing.” (Note that the language in the instant lease in fact was much more clear as to the landlord’s rights.)

Of course, even if the landlord has accepted rent, it is difficult for the tenant to make out a waiver of a continuing default if the default is significant and uncured. 

The treatise argues that where a default has occurred but the cure period has not yet run, the landlord should be required to extend unless the lease contains some language more pointed than a simple requirement that the tenant be  “in good standing.”

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