An oral agreement may modify a written lease

Real Estate Weekly, April 24, 1996 by Edward L. Schiff

However, there are circumstances under which an oral agreement may be enforced to modify a written lease. The case of Brook Shopping Centers Inc. vs. F. W. Woolworth Co., 628 N.Y.S.2d 318, describes an unusual example of how a long-term written lease can be modified by an oral agreement.

Two written leases wore entered into 40 years ago by F.W. Woolworth Co. with the landlord of a shopping center located in the Cross County Shopping Centex in Westchester County. The leases covered two stores and provided for pay payment by Woolworth of a base rent plus a percentage of its gross sales above a "break" point for each of the two stores. Both leases were renewed periodically over this 40-year period of time.

About 30 years ago, Woolworth started to use outdoor space adjoining the stores during the spring and summer season to sell plants and gardening supplies, even though the written leases did not expressly encompass Woolworth's use of the outdoor space.

During this 30-year period of time, Woolworth continued to pay rent on the basis of the "percentage of gross" aspect of the rent formula for that portion of sales related to the outdoor space. No base rent was paid for the outdoor space. Only the gross receipts which Woolworth created from the sales of gardening supplies attributable to the outdoor space was included in determining what the rent was for the outdoor area.

This arrangement continued without incident until May 1987, when a dispute arose between Woolworth and the owner of the shopping center, Brook Shopping Center, Inc., concerning totally unrelated matters. At that time, Brook began demanding base rent for the outdoor space in addition to the "percentage of gross" rent already being paid.

After an non-jury trial, the Supreme Court of Westchester County granted judgement in favor of Brook and awarded it an amount representing base rent for the outdoor space.

The Appellate Division, Second Department however, reversed. The Appellate Division ruled that, generally, the modification of a written lease is subject to the statute of frauds and therefore must be in writing. The court went on to state that an exception to the rule may occur, and an oral agreement can become binding, if it is supported by partial performance on the part of the parties, which is "unequivocally referable" to a modification of that written lease.

In this case, the landlord was aware that Woolworth was using the outdoor space and was paying rent based only on the percentage of sales generated from the outdoor area for about 20 years before an objection was raised. This was an acknowledgement that the written leases were modified by an oral agreement to allow for rent to be calculated on a percentage of gross sales only, for the outdoor space.

In fact, renewal of lease notices mailed by Woolworth during this time expressly defined the leases as encompassing "all prior modifications." This meant that the leases would be renewed including a modification made by oval agreement for Woolworth to pay only rent based on gross sales rather than including a base rent for the outdoor space.

Woolworth's payment and Brooks acceptance of a percentage rent of the outdoor space were "unequivocally referable" to an oral agreement to modify the written lease for Woolworth to use outdoor space and for Brook to accept a rent based only on a percentage of gross sales.

Thus, the oral modification of the written leases is enforceable against Brook for the remainder of the term of the leases.

(Edward L. Schiff is senior partner of the New York City law firm of Schiff, Turek, Kirschenbaum, O'Connell, LLP. The law firm specializes in real estate matters.)