Be Careful How You Negotiate AFTER You Sign a Contract

AutoTester and Fulcrum Central signed a long term lease (about 10.5 years worth of “long”) for commercial office space. But it didn’t take long for things to fall apart. Just two years into the deal, AutoTester couldn’t pay its rent, and by September of 2000, AutoTester owed $74,174.77 in back rent.

Trying to be nice about a bad situation, Fulcrum Central offered to rent the space to AutoTester on a day-to-day basis, for the whopping sum of $1 per day, so AutoTester could make an “orderly move out.” Here’s the exact language from the letter agreement, which eventually cost Fulcrum Central thousands of dollars in attorneys fees:

Pursuant to Landlord’s letter dated September 28, 2000, Landlord has terminated the Lease and Tenant’s right to possession. Tenant hereby acknowledges the termination of the lease. Landlord will allow Tenant to occupy the Premises on a day-to-day basis for rental of one dollar ($1.00) per day, terminable by Landlord with one (1) day’s notice, with our without cause. Tenant accepts the current Premises “as is.” Tenant further agrees to the following provisions in connection with its continued occupancy of the Premises: 1. Tenant agrees that it will maintain insurance on the Premises in accordance with Paragraphs 30 and 31 of the Lease. 2. Tenant agrees that the obligation to indemnify Landlord in accordance with the provisions of Paragraph 32 of the Lease is incorporated into this agreement in full. 3. Tenant further agrees to confine its use of the Premises to those uses set forth in Paragraph 4 of the Lease. 4 Tenant agrees to abide by the Rules and Regulations set forth in Rider No. 902 of the Lease. 5. This letter in no way reinstates the Lease.

After the move-out was said and done in November of 2000, AutoTester paid Fulcrum the $74,174.77 it owed in past due rent through September 28, plus the $1 per day from September 9 until it moved out. After all the dust had settled, on July 11, 2001, Fulcrum said “hold on, where’s the rest of my money, you know the $2.4 million plus, due under your lease?” and they filed a lawsuit to collect that rather staggering amount.

This only gave AutoTester the ability to turn the buck-a-day olive branch into a sword. It responded “wait just a minute, that September 28 letter was a ‘novation’ and as such eliminated our legal obligation to pay you another penny.” So at this point, the parties were some $2.4 million apart, and basically reconfirmed the principle that no good deed goes unpunished.

Here’s the rule. “Novation” is the fancy legal term that means a new agreement has been substituted in the place of an existing agreement between the same parties. If there is an intention to relinquish and extinguish pre-existing claims and rights of action, you have a “novation.” If one party accepts the promise of performance of a new obligation instead of the performance itself, you have a “novation.” And what is the effect of a “novation”? The new contract discharges the original contract’s obligations, and only the new obligation can be enforced.

In this case, AutoTester argued that the language from the September 28 letter (which is quoted above) was a novation of the original lease, with the effect that Fulcrum could not collect the $2.4 million in damages under the original lease. All Fulcrum could collect was the $1 per day, which had been paid. The trial court bought this defense and ruled that Fulcrum was out of luck. Needless to say, Fulcrum was not amused.

And so this case moved on along to the court of appeals, where that court restored some semblance of order. It applied the rule “a later agreement must be so inconsistent with a former agreement that the two cannot exist together,” to conclude that the letter agreement wasn’t inconsistent enough with the lease to be a whole new deal. And think of it. You have a one or two page letter, that speaks to a few brief issues, as compared to a 51 page Big Lease, probably on 14 inch paper and in 8 point type. The letter incorporates various parts of the Big Lease but doesn’t cover everything you would expect to see in a commercial occupancy lease. Said the court, “There’s no logical way that letter agreement could stand by itself, as a separate, new lease, at least without some additional evidence as to what the parties intended.” And you know how Fulcrum will answer that question.

Most interesting, the court of appeals wisely noted that if AutoTester really believed its own theory, it wouldn’t have bothered paying the $74,174.77 in back rent due through September 28, and if it was really renting that space for $1 per day, it would never move out until thrown out by Fulcrum. It’s just too good of a deal. Both of these facts raised the issue as to what was the real intent of the parties.

The moral to this story is this. Be very careful in any negotiation to clearly preserve prior claims. Watch what you say because it can and will be used against you in every way possible. When one party has their back against the wall, you can expect them to get creative in their defenses, and you never know when a court may make a wrong decision. We’re all human, it happens. Prevent it on the front end by planning more carefully how you conduct all of your “post-contract-signing” negotiations.

Fulcrum Central v.. Autotester, Inc., Texas Court of Appeals–Dallas, Case No. 05-02-01132-CV, March 17, 2003.

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