Side Letters

09 / 01 / 2019

2018 was a year in which many tenants have been in trouble financially.  One issue that is coming up more and more is that a landlord is being contacted by its tenant with a request to relax the strict terms of the lease as to the amount of rent paid or for rent to paid monthly rather than quarterly.  It might be difficult to find another tenant and the landlord might be minded to agree to such a request.

What points should a landlord consider if a tenant contacts it asking for a personal concession?

Firstly, a landlord should ask for evidence of the financial hardship before agreeing.  It could be a complete try-on by the tenant to reduce its rent.

Assuming that the landlord agrees to what is proposed, then the way of recording a personal concession to a tenant is by way of something called a side letter.

  1. What is a side letter?

A side letter is a short side contract between the landlord and tenant.  If it is intended to be personal to that named tenant, then it needs to be clear that it is personal to that tenant and will not benefit its successors in title.  The landlord will want it to clearly state that it falls away if the tenant assigns the lease or underlets the premises.  The side letter is usually binding on successors in title to the landlord.  If it wasn’t, the landlord could easily escape from its terms by assigning the property to a group company.

A side letter doesn’t take effect as a variation of the lease if it has been drafted correctly.

  1. Points to consider

If the tenant has a guarantor, the guarantor should also sign the side letter to show that it is aware of and acknowledges the terms.  Otherwise there could be an argument that its guarantee has been released. If the landlord’s interest has a charge over it, then the landlord should check whether it needs to obtain its mortgagee’s consent.

The parties need to consider how long the side letter concession period is going to last.

The parties also need to consider whether the side letter should end if the tenant fails to observe the terms of the lease or side letter.  It is recommended that such termination should be on notice from the landlord rather than automatically in the event of breach by the tenant. This avoids problems where the landlord doesn’t realise that the side letter has ended and carries on as though it was still in place and any risk of the landlord being estopped from treating the concession as ended. It also stops there being an argument that the side letter has been varied by conduct, or even that the terms of the lease have been varied by conduct.

  1. Could the termination of the side letter be a penalty?

In a recent case, Vivienne Westwood Limited v Conduit Street Development Limited, the termination provisions of a side letter were held by the High Court to be an unenforceable penalty.

Vivienne Westwood Limited entered into a lease for a term of 15 years at a rent of £110,000 per annum with upwards only rent reviews every 5 years.  At the same time the tenant entered into a side letter.  This reduced the actual rent payable to £90,000 stepping up to £100,000 and introduced a cap on the first rent review. The side letter included the wording “if you breach any of the terms and conditions contained in this agreement or any term of the lease and or any documents supplemental to it (for example the licence to alter) we may terminate this agreement with immediate effect and the rents will be immediately payable in the manner set out in the lease as if this agreement never existed”.

The tenant paid its rent late and the landlord wrote to it confirming that the side letter had ended.  It argued that on the wording set out above, that the tenant was not only liable for the higher rent set out in the lease going forwards but also for preceding years.

The termination provision was held to be an unenforceable penalty.  The Court didn’t like the fact that the side letter stated that it could be terminated for any breach, rather than any non-trivial breach and the fact that the termination had a retrospective effect as though the side letter had never existed.

The case very much depended on the specific facts and in particular that the side letter had been entered into simultaneously with the lease and because the landlord was trying to attract a prestigious tenant.  The Court interpreted the primary obligation of the tenant as being to pay the rent as set out in the side letter.  Paying the market rent as set out in the lease was interpreted as being a detriment imposed on the tenant if it failed to perform its primary obligation in the side letter.  This detriment was exorbitant or unconscionable.  This analysis is quite surprising for practitioners, who would normally regard the primary obligation as being the one set out in the lease and the side letter as being a temporary or personal waiver of this.

The case is concerning as it means there will be a number of side letters in existence which have termination provisions which are unenforceable.  The practical advice for future side letters being entered into is for the landlord to try to avoid the side letter being interpreted as changing the tenant’s primary obligation.  The landlord should also try to avoid being too harsh in the consequences of termination and set out a consequence that is fair and legitimate.

Conclusion

More care needs to be taken by landlords and tenants in considering, and then setting out clearly the consequences of termination of the side letter.  It may not be so clever after all to have a document which is heavily weighted against the tenant.