The construction of side letters and their enforceability has been a hotly contested topic, ever more so since the recent decision in the case of Vivienne Westwood Limited v Conduit Street Developments  EWCH 350.
Side letters are a common tool in property transactions, used by landlords and tenants to document terms that have been negotiated between the parties but will not appear in the body of the lease itself.
Whether it be to provide clarity or record additional details of a lease, to offer a concession to a particular tenant, or to document a variation to a lease which has already been drawn or completed, side letters appear to provide a straightforward, pragmatic and cost effective tool in negotiations.
So what’s the catch?
Although a useful aid and widely used, side letters are often questioned on their construction, validity and interpretation. Landlords need to be aware and should consider the following drafting advice:
1. Formation of the Side Letter
To be legally binding a side letter must follow the key principles of contract law:
• Offer & Acceptance – this is often seen as the simplest stage to prove.
• Intention to create legal relations – although not definitive this can often be satisfied by the conduct of the parties, the use of boiler plate contract clauses in the side letter and the letter having been signed by both parties.
• Consideration – this can be nominal and is often circumvented by entering into a deed.
2. Is the concession temporary?
Often, a concession is to be granted to the tenant for a fixed period of time. If so, the side letter needs to be clear, unambiguous and document this. If for a fixed number of years, then the side letter should stipulate this. If upon the happening of a certain event then the side letter should detail this.
3. Is the side letter personal to the parties involved?
Side letters will often be used to provide a concession to a tenant which is to be non assignable, i.e. not to be transferred to any third party. This is often the case when a reduced level of rent is being offered to a particular tenant. If so, then the side letter must unequivocally record this. Landlords should also consider if any group or subsidiary companies of the tenant should be afforded this benefit.
Likewise a Landlord will also need to consider whether this agreement will bind future landlords.
4. Does the side letter create a penalty?
Landlords must ensure that the side letter does not include a clause which can be construed as a penalty on the tenant and held to be unenforceable. This was highlighted recently in the Vivienne Westwood case.
Here, the terms of a side letter reduced the rent payable by Westwood to £90,000 staged up to £100,000 for the first five years of the term. This was then capped at £125,000 if a rent review took place.
A further term of the side letter was that the landlord could terminate the side letter (and subsequently the rent concession) following a breach of any term of the lease. The Tenant breached the lease and the Landlord considered the side letter to be terminated. Once terminated, the landlord carried out a rent review under the original terms of the lease. This resulted in a higher rent of £232,500 being demanded.
Principally the court found that the clause would have a disproportionate impact on the tenant. This clause reflected the unequal bargaining positon of the parties involved and would cause a wholly disproportionate financial disadvantage to the tenant. The clause was seen as a penalty, the termination of the side letter unenforceable and the tenant only liable to pay the lesser sum of rent.
If drafted correctly side letters can be an extremely useful aid for both landlord and tenant. However, the Vivienne Westwood case is a reminder and a clear precautionary tail of the importance of good drafting.
If you are considering entering into a new lease and there are terms to be documented by way of side letter then careful thought and consideration should be given to the way in which that side letter is drawn up. If you would like to discuss your requirements further, please contact Cathryn Pernstich or an alternative member of the Commercial Property team on 01737854542. For more information on Commercial Property please click here to visit our website.