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No oral modification clauses: worth having after all

Posted: 29/06/2018

Property professionals are very familiar with the idea that many contracts creating an interest in real property have to be in writing and signed by all the parties, otherwise the contract has no effect. Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 provides that contracts for the sale or other disposition of an interest in land must be in writing and signed by all the parties. This gives certainty and removes the risk of misunderstandings and litigation.

Licences to occupy real property, however, fall outside this regime, as do many other contracts dealt with by property professionals. Outside of those areas where writing is a statutory requirement, oral contracts are perfectly permissible and enforceable.

A licence to occupy does not create an interest in land; it is merely a personal contract between the occupier and the owner of a property. Does the law support a specific provision in such a contract requiring any variation to be in writing?

The Supreme Court considered this in MWB Business Exchange Centres v Rock Advertising Limited [2018] UKSC 24. 

Rock bottom: the facts

MWB is an operator of serviced office space in London. Rock Advertising took a licence to occupy some of MWB’s office space in Marble Arch for a fixed period of twelve months. The fee was £3,000 per month for the first three months of the licence and then £4,333.34 for the last nine months. The licence contained a ’no oral modification clause’ which stated that “All variations to this licence must be agreed, set out in writing and signed on behalf of both parties before they take effect”.

Rock fell into arrears of the licence fee. It then put a payment proposal to MWB offering to pay the licence fee later than the due date, with the arrears already incurred to be paid off in instalments over the remaining term of the licence.

MWB was clearly not impressed with this proposal as it then locked Rock out of the premises for failure to pay the licence fee and, for good measure, sued Rock for the licence fee arrears in full.

Rock contended that an arrangement to pay the arrears by instalments was agreed by all the parties and was binding, notwithstanding the term in the licence stating that any variation was to be in writing. MWB’s case was that the proposal for a payment plan for licence fees and arrears was merely a proposal and that nothing had been agreed. And anyway, even if it had been agreed, it wasn’t in writing and therefore, because of the no oral modification clause, an oral agreement was of no effect.

It is worth noting here that Rock had done nothing over and above what it was contractually obliged to do under the licence. In fact, it was proposing to do less than its contractual obligations by paying licence fees late and over an extended period. Rock did not act in any way that made Rock worse off due to the oral agreement. So there was no question of an ’estoppel’ arising, which it might do in different circumstances. For example, if Rock had paid increased rent on the basis of an oral agreement that it would be allowed to remain in occupation, this would have provided a defence to the claim by MWB.

Exchange of views: judicial history

The judge at first instance found that a valid oral agreement had been made to vary the licence to allow payment of the licence fee on the basis of the revised payment schedule.  However, that variation was ineffective, because of the no oral modification clause in the licence. The Court of Appeal disagreed with the first instance judge, upholding the oral agreement and finding that the agreement to amend the payment provisions of the licence also amounted to an amendment of the no oral modification clause.

The Supreme Court, overturning the judgment of the Court of Appeal, upheld the no oral modification clause and found that the oral agreement to modify the licence provisions for payment of the licence fee was ineffective. Where the parties have originally agreed a contractual provision requiring certain formalities in order to vary their contractual obligations, the court will not offer parties that do not comply with those formalities an easy way out. The Supreme Court considered that formally recording variations in writing gave certainty as to what had been agreed and avoided disputes as to whether or not any agreement to vary had been made at all.

It is hard to argue with that.

As an aside, it is difficult to see how the costs of pursuing this matter to the Supreme Court could be held to be proportionate when the maximum amount of the licence fee that could be in dispute was less than £50,000. The importance of the principles considered in this case are clear however, as it gives much needed authority, at the highest level, on fundamental questions of contract law. As Lord Sumption noted, this appeal is exceptional because ‘Modern litigation rarely raises truly fundamental issues in the law of contract’.

Practical pointers

If you are granting a licence to occupy property, give serious consideration to including a no oral modification clause. This is a straightforward way of avoiding disputes as to whether a conversation between the parties about a rent reduction for example, or an extension of the licence period, was an enforceable agreement or just an informal discussion.

The law will uphold requirements on parties to a contract to comply with formalities in order to achieve a binding variation of their original agreement. After all, they agreed to those provisions in the first place. A no oral modification clause is a valid way of stopping parties from attempting to undermine written agreements by alleging that there has been an oral variation or an oral collateral contract. 

This article was published in New Law Journal in June 2018.

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