Reservation of Rights Letters
Have Your Cake and Eat It Too
A reservation of rights letter (a “RORL”) is a notice that one party to a contract or dispute (the “sender”) provides to the other party (the “recipient”) in order to preserve certain contract rights or remedies that might otherwise be deemed waived as a result of the sender’s actions. A typical RORL will include language that the sender’s performance of a certain act “is not a waiver of any of the sender’s rights under the contract and applicable law” and that the sender “reserves all of its rights and remedies under the contract and applicable law.” In Virginia, as in most states, RORLs are principally used by landlords and insurance companies.
The most frequent use of a RORL in the leasing context occurs when a landlord receives a payment from the tenant for less than the entire amount owed. The landlord will send the tenant a RORL stating that the landlord accepts the payment but reserves its rights under the lease to recover the full amount owed and/or to recover possession of the rented property. In the residential eviction context in Virginia, Virginia Code § 55-248.34:1 requires the landlord to provide a RORL if the landlord wishes to accept partial payment of rent owed and still receive an order of possession for the property. Many judges will not permit eviction for non-payment of rent to proceed if a landlord has accepted partial payment from the tenant without sending a RORL. A landlord may also send a RORL to a tenant that is in non-monetary default of the lease if the landlord does not intend to take immediate action to enforce the lease, but wishes to reserve the right to take such action in the future. Ultimately, a court will decide whether the RORL effectively preserved the landlord’s rights.
Insurance carriers regularly use RORLs to preserve their rights to deny coverage. Virginia Code § 38.2-2226 requires an insurance company to provide notice to its insured when the carrier “discovers a breach of the terms or conditions of the insurance contract by the insured”. Failure to provide such notice within the time period specified in the statute can result in a waiver of the insurance company’s right to assert such breach as a defense to the insured’s claim. It is common for an insurance company to send a RORL when it has not yet determined whether it will pay the eventual judgment or settlement against the insured. In some cases, the insurance company will send a RORL but still provide a defense to the claim and wait to see how the claim is resolved.
Opposing attorneys often use RORLs during litigation as they explore the possibility of settlement for their clients. An attorney may concede certain issues or disputed facts “for settlement purposes only” and subject to a written reservation that, if the parties are unable to settle the case, the attorney’s client reserves the right to assert all claims and defenses.
In summary, a RORL should be employed whenever a party to a dispute or contract intends to take action that could be deemed a waiver or concession of such party’s legal rights. The RORL will serve as evidence in court that no such waiver or concession was intended should the opposing party assert such a defense.