A reservation of rights clause is a statement of intention that reserves a party’s full legal rights under an agreement or contract, and advises the other party(ies) of the fact by putting them on notice. A reservation of rights clause can also reserve rights to remedies, under the law and at equity, as well as in the contract. Different industries such as insurance, legal, commercial real estate, and banking commonly use various types of reservations or rights clauses, which vary based on context.
Key points about reservation of rights clauses
- Protection of a party’s rights, calling attention to the fact that the party is not waiving or otherwise surrendering its rights.
- At their discretion, the reserving party can take some action, at a later time, by reserving its rights.
- A party’s actions or inactions do not imply a waiver of any rights and/or remedies when using a reservation of rights clause.
Examples of reservation of rights clauses
Insurance claims reservation of rights clause
Example: “The Flame Insurance Company reserves all of its rights under this insurance policy, and at law.”
Reservation of rights clauses are commonly found in insurance claim letters. An insurance claim letter is sent to the person or entity that is insured by the insurance company when investigating a claim. The reservation of rights itself neither denies nor guarantees coverage of an insurance claim or any rights regarding the claim; it simply indicates that the insurance company has the right to provide or deny coverage based on the results of its investigation.
Demand letter reservation of rights clause
Example: “All rights and remedies at law and at equity are hereby reserved.”
A demand letter is sent to a potential defendant (or its counsel), usually to put the recipient on notice to resolve a matter before the sender commences a lawsuit. Alternatively, it is sent to demand that the recipient start or stop an action and warns of what will happen if the recipient does not comply with the demand. The demand letter advises the recipient that the sender has legal rights, and those rights may be pursued in a legal setting, such as a courtroom, if the sender does not receive satisfactory relief from the recipient. A demand letter is usually an effort to settle a matter without litigation, but the reservation of rights clause warns the recipient that the sender may still file the lawsuit, or take other actions, if the parties do not resolve the dispute.
Commercial real estate reservation of rights clause
Example: “Seller reserves the right to collect any past due rent from tenants with past due balances.”
Under a commercial real estate contract, a reservation of rights clause is used to reserve a party’s rights and remedies in the event of a breach of the contract. In a rent setting, if a tenant is late paying rent, the landlord may extend the time to pay, but also has the option to enforce the terms of the contract, including late fees, penalties, and the entire amount of the rent that is owed.
In a sale setting, if a real estate purchase does not close, due to the fault of a party, the other party may provide an opportunity for the party at fault to fix the problem and complete the transaction. If the issue is not remedied, the other party may pursue all of its rights under the contract and the law. A reservation of rights provides that a party’s acts or failure to act does not give rise to any implied waiver of any rights and remedies.
Acquisition loan agreement reservation of rights clause
Example: “This clause provides that a lender maintains all of its rights and remedies irrespective of any action or inaction on the part of lender. This clause ensures that no action, including delays, omissions, or other changes in the loan administration before or after a borrower default, limit any of lender's rights and remedies.” [1]
A reservation of rights clause in an acquisition loan agreement allows the lender to reserve its right and take action against the borrower if there is a breach of the loan agreement. At the time of borrower breach,the lender may informally attempt to resolve the breach by sending a demand letter. That demand letter will likely contain a reservation of rights clause, like the above. If the parties are unable to informally resolve the issue, the lender still can pursue its rights as provided under the law and the loan agreement.
Banking letter reservation of rights clause
Example: “Reservation of Rights and Remedies. This Second Amendment shall not, except as expressly provided herein, operate as a waiver of any right or remedy of Agent or Lenders under any of the Loan Documents, nor constitute a waiver of any provision of the Loan Documents. Agent and Lenders reserve all of their rights to proceed to enforce their rights and remedies at any time and from time to time in connection with any and all Defaults or Events of Default now existing or hereafter arising.”
A reservation of rights clause in a banking letter allows a lending bank to reserve its rights and remedies while it tries to resolve an issue, usually a default, with the borrower. The reservation of rights clause provides that any communication of resolution between the parties will not constitute a waiver of the bank’s rights. Specifically, the above example reflects that the bank is reserving its rights or remedies outlined in the original agreement, and putting the reader on notice that they are not waived, and the Second Amendment does not waive them except as specifically set forth. Remedies are also reserved, at any time.It is important for lenders to use the utmost care when reserving their rights and remedies to avoid a substantial monetary loss.
“Rights” vs. “Rights and Remedies”
On paper, the reservation of “rights and remedies” explicitly reserves both the rights in a document and its remedies, while reservation of “right” only, explicitly reserves the right–not remedies. However, in practice, even if only rights are explicitly reserved and remedies are not, the harmed party’s remedies are also likely reserved. Since it is a right that gives rise to remedies, once a right is reserved, it generally also follows that the corresponding remedy would also be reserved, as well. Many lawyers, however, simply put the catchall phrase “rights and remedies” to avoid any doubt as to the coverage of the reservation.
Example: Reservation of Remedies. “Except where otherwise expressly specified, the rights and remedies granted to a Party under this Agreement are cumulative and in addition to, and not in lieu of, any other rights or remedies which the Party may possess at law or in equity; provided that, in connection with any dispute hereunder, neither Party shall be entitled to offset any amounts that such Party claims to be due and payable from the other Party against amounts otherwise payable by the claiming Party to the other Party.”
In this example, the remedies are cumulative (for example, a late fee and an interest charge). The reservation of rights also clarifies that the parties have the remedies that are in the agreement between them, as well as the remedies available under the law, which may not be specifically named in the agreement between the parties.
Reserving the right to pursue legal action
Reserving the right to pursue legal action means that the party enforcing its rights may resort to a court-imposed legal remedy, such as an injunction or a lawsuit.
Reserving rights to other remedies, generally, include remedies that do not need to be enforced by the court, such as penalties,fees and/or interest payments, as agreed to between the parties.
What does it mean to reserve the right?
To reserve the right means to inform a party to an agreement that the reserving party has the legal right to do, or not do, something. The right may be provided by the law, or by the agreement between the parties. It is important to note that just because the right is not being enforced immediately does not mean it might not be enforced in the future.
[1] 08/19/2019 (INDUSTRIAL SERVICES OF AMERICA INC); Practical Guidance: https://content.next.westlaw.com/practical-law/document/I59dd10f4ef2a11e28578f7ccc38dcbee/Notice-of-Default-Reservation-of-Rights-Lending?viewType=FullText&contextData=%28sc.Default%29&transitionType=Default
