Lily Meyer, an Associate Solicitor in our Commercial Property department explores favourable terms when negotiating a commercial lease explaining why “side letters” can be bias towards a landlord, this will be discussed further in this article with a recent case involving Vivienne Westwood.
When a landlord and a tenant are negotiating the terms of a commercial lease, they may decide to record more favourable terms (which are specific to a particular tenant) in what is known as a “side letter.” Such terms may include a reduced rent, a rent free period, or, a cap on the service charge.
This is not only a way for a landlord to offer personal concessions to a specific tenant, but is also a way of keeping certain terms confidential. Unlike longer term leases, a side letter does not need to be lodged at the Land Registry.
There are therefore, often good commercial reasons for entering into a side letter.
Despite this, if a side letter seems to be particularly unfair to one party or is “landlord biased”, in some circumstances, the court may be prepared to intervene (Vivienne Westwood v. Conduit Street Developments Limited (2017)).
In that particular case, Vivienne Westwood Limited (VW) had agreed a lease with 5 yearly rent reviews. VW, however, had also entered into a side letter with the landlord confirming that they would actually pay a lower rent of £125,000 per year for the first ten years of the term.
It was thought that the landlord had agreed the lower rent in return for having a prestigious tenant. The landlord had, however, reserved the right to terminate the lower rent concession, if there was a breach of any terms of the lease.
On one occasion, VW paid its rent to the landlord late, meaning it was technically in breach of the lease. As a result, the landlord terminated the concession granted by the side letter and increased the rent to £232,000 per year.
The tenant disputed this and asserted that termination was an unfair penalty which would render the termination void. The tenant’s argument was that its primary obligation was to pay the rent set out in the side letter, rather than under the lease, which was a secondary obligation.
The Judge agreed that the terms of the side letter were the tenant’s primary obligations and, therefore, ruled that the rent would remain at £125,000 per annum.
The rationale behind this is that, if a penalty for a breach of covenant is deemed sufficient, then the withdrawal of the side letter concession for that same breach is likely to be considered excessive. In this instance the penalty was interest being charged on the late payment.
Landlords must, therefore, carefully consider the terms of any side letter before agreeing to enter into one. Any clauses that could be construed as being unusually onerous, such as the one in the VW case, should be avoided.
From a tenant’s perspective, one of the key terms to consider, before agreeing to enter into a side letter, is whether the letter is binding on the landlord’s successors in title. Typically such letters are personal to the parties to the original letter, meaning that the concessions enjoyed will usually fall away if and when the original parties cease to be the landlord and tenant.
It is, therefore, important when agreeing side letters to record additional terms or clarify the intention behind contract wording to give careful thought to their form to ensure that they are effective and do not commit parties to arrangements further than intended.
To discuss this further or any other commercial property requirements, please contact the Commercial Property Team on 020 8943 1441. For more information on Commercial Property please visit their department page.