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Kent Holland, Esq. and James Rhodes, Esq.

The Maryland Court of Appeals held that parties’ oral agreements and/or actions can waive a “condition precedent”, notwithstanding an explicit “non-waiver” clause in the contract. Hovnanian Land Investment Group, LLC v. Annapolis Towne Center at Parole, LLC, 421 Md. 94, 25 A.3d 967 (2011).
In this case, a developer sought to terminate its purchase agreement for land to build residential towers in a mixed-use development, when the primary developer had purportedly failed to meet a required condition precedent with respect to funding the maintenance of common areas in the development.

Annapolis Town Centre at Parole, LLC (“ATC”) was the developer of a large, mixed-use town center in Annapolis Maryland.  ATC entered into a purchase agreement in 2005 with Hovnanian Land Investment Group, LLC for the sale of two parcels at the development for the construction of three residential towers.  Under the development scheme, ATC was to retain ownership over common areas of the development and collect annual common area maintenance (“CAM”) fees from the residential and commercial parcel owners.

The purchase agreement between ATC and Hovnanian indicated that ATC would establish the CAM fees and other details of the common area maintenance via a written “Declaration” as a “condition precedent” before closing.  The purchase agreement also contained a familiar non-waiver clause, which read as follows:

 No change or modification of this Agreement shall be valid unless the same is in writing and signed by Purchaser and Seller.  No purported or alleged waiver of any of the provisions of this Agreement shall be binding or effective unless in writing and signed by the party against whom it is sought to be enforced.

During 2006, ATC provided a draft Declaration pertaining to the CAM fees and related issues of the common areas.  The parties discussed Hovnanian’s concerns over various aspects of the draft over several months.  In early 2008, the parties could not agree on Hovnanian’s request for a price reduction and a second extension of the closing date to shore up its financing, in the midst of the economic downturn.  Hovnanian then sought a termination of the Purchase Agreement, claiming that ATC had not met the “condition precedent” with respect to details of the CAM fees before closing.  ATC argued in return that the Declaration met the contract requirements, and that regardless the parties had agreed to address the CAM fees via a future supplemental agreement.

ATC filed a complaint in circuit court seeking a declaratory judgment that Hovnanian’s termination was in breach.  The circuit court granted ATC’s motion for summary judgment, finding that ATC had “strictly complied” with the CAM provision of the Purchase Agreement, and that in the alternative Hovnanian had waived the CAM funding condition through its actions.  The intermediate appellate court focused on the latter, agreeing with the circuit court that Hovnanian waived the “condition precedent.”

On appeal to Maryland’s high court—the Court of Appeals of Maryland—the court first addressed the legal issue of whether one can waive a contractual right through its actions, despite a “non-waiver” clause.  Harkening back to established precedents and treatises, the court explained that the “Maryland approach” is consistent with the “universal approach of commentators to disfavor strict adherence to non-waiver or non-modification clauses.”  Despite the usually explicit wording of a non-waiver clause, the court explained the general unwillingness to give a “dispositive and preclusive effect” to a limitation on the parties’ ability to make future changes to the contract.

The court explained that “a party may waive, by its actions or statements, a condition precedent in a contract, even when that contract has a non-waiver clause.”  The court was careful to say that the decision does not hold that “non-waiver clauses should be ignored altogether.”  Instead, the effect of the disfavored clauses must be construed by the trier of fact, to see if the party alleging waiver can show “an intent to waive both the contract provision at issue and the non-waiver clause.”  However, the court explained that the “waiver” of the “non-waiver clause” could be implied through the same actions that waived the condition precedent; the court rejected Honvanian’s argument that waiver of the non-waiver provision itself must be “explicit” and “independent” of the substantive waiver of a legal right at issue.

Finally, the court disagreed with the lower courts ATC was entitled to summary judgment.  The court believed further factual inquiry would be needed to determine whether Hovnanian had waived its rights with respect to CAM fees condition.  The court noted that such analysis is generally a “highly factual inquiry” that should be addressed at trial, as opposed to legal matter decided on summary judgment.  The court also disagreed with the circuit court that the Declaration itself was in strict fulfillment of the condition precedent, making the waiver issue of central importance.

The case highlights that one must be skeptical of the effect of a seemingly explicit non-waiver provision.  As explained in detail in the decision, courts are loathe to strictly enforce a provision that purports to limit the parties’ flexibility to adapt and agreement.  At the backdrop of this case is also an equitable issue.  The real motivator behind Hovnanian backing out of the deal was clearly problems associated with the financial crisis, not the disagreement over the CAM fees standing alone.  Under principles of equity, courts will disfavor attempts to play such a condition as a “trump card”, where it conflicts with the parties’ course of conduct on the issue.

 

About the author: Article written by J. Kent Holland, Jr., Esq. and James Rhodes, Esq.

Kent Holland is a construction lawyer located in Tysons Corner, Virginia,  with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk.com Report, Vol. 16, No. 5 (May 2014).

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