Bar Exam — MBE (Multistate Bar Exam)ContractsMedium
A landlord and a tenant entered into a one-year lease agreement for an apartment at $1,000 per month. After six months, the tenant lost her job and informed the landlord that she could no longer afford the rent. The landlord and tenant then orally agreed that the tenant could break the lease early, provided she found a suitable replacement tenant. The tenant found a suitable replacement, and the landlord accepted the replacement. What is the legal effect of this agreement and the tenant's actions?
- AThe original lease is discharged by substituted contract.
- BThe original lease is discharged by novation.
- CThe original lease is discharged by accord and satisfaction.
- DThe original lease is discharged by mutual rescission.
Show answer & explanationAnswer & explanation
Correct answer: D. The original lease is discharged by mutual rescission.
Mutual rescission occurs when both parties agree to cancel an existing contract. Here, the landlord and tenant orally agreed to terminate the original lease, which is permissible for an executory contract (one not fully performed by both sides).
Why the other options are wrong
- A. This is incorrect. A substituted contract replaces an existing contract with a new one. While a new lease might be formed with the replacement tenant, the agreement between the original landlord and tenant was to terminate their existing lease, which is a rescission.
- B. This is incorrect. Novation involves replacing one of the original parties with a new party, with the consent of all three (original obligor, obligee, and new obligor). While a replacement tenant was found, the agreement was primarily to terminate the original lease, not substitute the tenant within the existing lease terms without the original tenant's liability.
- C. This is incorrect. Accord and satisfaction typically involves a dispute over an unliquidated or disputed debt, and a new agreement (accord) that discharges the old one upon performance (satisfaction). Here, it's a mutual agreement to terminate the entire contract.
Mutual Rescission
Mutual rescission is an agreement between both parties to an existing contract to terminate their contractual duties. It is effective if the contract is still executory on both sides.
- Requires mutual agreement to cancel the contract.
- Original contract must still have unperformed duties on both sides (executory).
- Can be oral, even if the original contract was in writing, unless subject to Statute of Frauds for the new agreement.
- Distinguish from Novation (replacing a party) and Accord and Satisfaction (disputed debt resolution).
Memory trick: Agreements Alter, Annul, or Allow Alternatives.