By Douglas M. Bregman1
Earlier this year, the Court of Appeals of Maryland held that two out of three parties to an agreement could modify it despite a provision in the agreement expressly stating that any modification or cancellation required written signatures of all three original parties. The case, 600 North Frederick Road, LLC v. Burlington Coat Factory of Maryland, LLC, involves a dispute regarding an amendment to a covenant agreement governing three parcels of land adjacent to Maryland Route 355 and Perry Parkway in Gaithersburg, Maryland.2
At some time prior to 1976, a large tract of land was divided into these three parcels, which were denominated as “Parcel One,” “Parcel Two,” and “Parcel Three.” Parcel One (approximately 2.47 acres), is on the northeast corner of the tract, at the intersection of Perry Parkway and Route 355. Parcel Two (approximately 7.53 acres) is west of Parcel One, and is bounded by Perry Parkway and Route 355. Parcel Three is west of Parcels One and Two, with Perry Parkway on the south, Montgomery Village Avenue on the northwest, and Route 355 on the northeast.
In 1976, the owner of all three parcels at that time, Danac Real Estate Investment Corporation (“Danac”), signed a thirty-year lease agreement with Montgomery Ward (“Ward”) involving Parcels One and Two, and Ward built a retail store on Parcel One and parking for the store on Parcel Two. Under the terms of the 1976 lease, Ward’s use of Parcel Two was subject to Danac’s right to develop that parcel and Danac could not develop the parcel without Ward’s consent (and consent could not be withheld unreasonably). Over time, Danac conveyed Parcels One and Two and parts of its Parcel Three land to others.
In 1981, the owners of the three parcels at that time executed a covenant agreement (“1981 Declaration”) that, among other things, reserved Danac’s right to development on Parcel Two even though it had plans to sell the property, re-affirmed the rights of the tenant of Parcel One over Parcel Two under the terms of the 1976 lease, and explicitly provided that the agreement could be modified or cancelled only by written instrument signed by the owners of all of the parcels. In 1983, Danac requested Ward’s consent to build a commercial development on Parcel Two and when Ward objected, the two parties became involved in litigation. The litigation ultimately settled. As part of the settlement, the parties negotiated an amendment to the 1981 Declaration, the “1992 Declaration.” Among other things, the 1992 Declaration delineated in greater detail Danac’s development rights over Parcel Two and created a Restricted Development Area in Parcel Two. The 1992 Declaration was not signed by the owners of Parcel Three.
In 1998, Ward assigned its interest as tenant under the 1976 lease to Burlington Coat Factory (“BCF”) and BCF began operating a store on Parcel One, together with the parking lot on Parcel Two. In 2003, petitioner, 600 North Frederick Road, LLC (“600 North Frederick”), bought Parcels One and Two. Twice, in 2003 and in 2005, 600 North Frederick tried to enter into plans with developers to construct mixed-use developments on Parcel Two. In both instances, BCF’s consent was not forthcoming (based at least in part on BCF’s reliance on the 1992 Declaration) and the potential development agreements expired. In 2007, frustrated by BCF’s refusal to consent to development, 600 North Frederick filed a lawsuit for declaratory relief against BCF in the Circuit Court for Montgomery County, asserting, among other things, that the 1992 Declaration was invalid. 600 North Frederick argued that the 1992 Declaration was unenforceable because it was only signed by the owners of Parcels One and Two, but not by the owners of Parcel Three, and the 1981 Declaration had provided that it “may be modified or cancelled only by written instrument signed by the owners of [all] the Parcels.” 600 North Frederick argued that the 1981 Declaration was clear and unambiguous on its face, and thus its terms should control, rendering the 1992 Declaration invalid because it was not signed by the owners of all three parcels. 600 North Frederick had good reason to think its argument was a strong one – when the terms of a contract are clear, Maryland courts do not hesitate to apply their plain meaning.3
In its decision, the trial court did not rely on the plain meaning of the provision at issue. Instead, the court agreed with BCF’s argument that the signatures of the Parcel Three owners were not necessary and looked to whether the owners of Parcel Three would be prejudiced by allowing the owners of Parcel One and Two to modify the agreement as it presumably pertained to them alone. The trial court reasoned that its interpretation was consistent with Maryland law, because such an interpretation favors the free modification of contracts.4 600 North Frederick appealed, and the Court of Special Appeals affirmed. 600 North Frederick sought and was granted certiorari to the Court of Appeals. As discussed below, the Court of Appeals agreed with the lower courts that the 1992 Declaration was valid and enforceable but vacated the judgment of the Court of Special Appeals and remanded the case to the Circuit Court to determine if there was any prejudice to the owners of Parcel Three who did not sign the 1992 Agreement.
BCF, the trial court, and the appellate courts cited a California case, Hotle v. Miller,5 to support their positions. Their reliance on this case from another jurisdiction is intriguing, especially given that the circumstances of the case differ from those of 600 North Frederick Road. In Hotle, a couple opened a bank account and executed a deposit agreement among themselves and the bank that provided that all money put in the account would be community property. More than a decade later, and without consent or knowledge of the bank, the husband executed a will to dispose of all of the community property and the wife executed a waiver of claim to her share of the property. Upon the husband’s death, executors of his estate sought to treat the deposit agreement as modified by the couple’s subsequent agreement so they could distribute the property according to the terms of his will. Executors of the wife’s estate argued that the subsequent oral agreement could not operate to change the rights of the parties because the bank was not party to it. The California Supreme Court ultimately held that the new agreement between husband and wife was valid and enforceable, but that in the case of such subsequent agreements absent original signatories, two parties to a tripartite agreement cannot change it to the prejudice of the third party.6 Because there was no prejudice to the bank, the subsequent agreement by the couple was found to be valid and enforceable.7
In relying on Hotle, the Court of Appeals was not persuaded that the facts of that case and the facts of 600 North Frederick Road were distinguishable. While the parties in 600 North Frederick Road specifically contracted to require agreement of all parties in any subsequent modification to the 1981 Declaration, the initial deposit agreement in Hotle was silent on the subject of future modification. The Court of Appeals found that this was “a distinction without a difference” because the rule that two parties to a tripartite agreement may modify that agreement, at least between them, if the non-consenting party is not prejudiced thereby “would apply not only to contracts that are silent on this point, but also those whose express terms are to the contrary.”8 Thus, while citing freedom to modify contracts as one of its reasons to adopt the Hotle rule, the Court of Appeals also decided that the contract language requiring all parties to an agreement also to have to sign an amendment to that agreement did not, in all instances, have to be followed.
The Court of Appeals also was not persuaded by other significant differences between the two situations that might have weighed against adopting the Hotle holding. For one thing, Maryland courts have for a long time employed strict construction in the interpretation of contract provisions, and this decision was not consistent with such an interpretation.9 Additionally, the documents at issue were very different. While Hotle involved an agreement over a bank deposit card, the type of agreement that can and often does change with relative frequency, 600 North Frederick Road involved a permanent covenant agreement – the 1981 Declaration – recorded among the land records, that petitioners aptly characterized as “among the most formal and solemn documents known to the law.”10
The immediate outcome of the decision in 600 North Frederick Road is that parties who want to specify in a contract that modifications cannot occur without written consent of all parties will have no certainty that their agreement will be upheld in court.
In Maryland, the objective law of contracts is followed when interpreting the language of a contract. Freedman v. Comcast Corp., 190 Md.App. 179, 192 (2010) (citing Koons Ford of Balt., Inc. v. Lobach, 398 Md. 38, 47 (2007)). When the language of the contract is plain and unambiguous, there is no room for construction, and a court must presume that the parties meant what they expressed. Freedman, 190 Md.App. at 192 (citing General Motors Acceptance Corp. v. Daniels, 303 Md. 254, 261 (1985)).
600 North Frederick Road, LLC v. Burlington Coat Factory of Maryland, Case No. 284032V (Cir. Ct. Montgomery Cty., Md. May 22, 2009) at 23(citing Littell v. Morton, 369 F. Supp. 411, 422 (D. Md. 1974)).
See General Motors Acceptance Corp., supra note 2, 303 Md. at 261; see also Owens-Illinois, Inc. v. Cook, 386 Md. 468, 496 (2005); Langston v. Langston, 366 Md. 490, 507 (2001); Bd. of Trs. Of State Colls. v. Sherman, 280 Md. 373, 380 (1977).