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Recap – Side Letters and Commercial Leases

8 March 2024

Side Letters offer a useful legal tool alongside a commercial lease to deal with personal concessions or arrangements between the parties to the original lease. They can have unintended (costly) consequences when used incorrectly. This article explores Side Letters in more detail.

Is a Side Letter a Lease Variation?

• The Side Letter should state that it does not amount to a variation of the lease;
• Side Letters are usually intended to make temporary alterative arrangements between the parties e.g. how often rent is paid and to grant temporary concessions (e.g. a temporary rent suspension); they are not intended to vary the terms of the lease;
• This is important in the context of open market rent reviews – the Side Letter may state that it does not impact rent review.

Is a Side Letter binding and enforceable?

• A Side Letter has to be clear in its terms and the parties’ respective obligations or it could be found to be unenforceable (if the precise terms are not clear, the court will look at the surrounding circumstances to determine what it means but if it cannot make sense of it, it will be found to be unenforceable).
• A Side Letter should follow the requirements for making a contract e.g. refer to consideration even if nominal and state that the Side Letter is legally binding;

Can a Side Letter bind successors in title?

• Unless a Side Letter says it does not bind a Landlord’s successors in title, there is a risk it will do (this is critical information for future sales of investment property e.g. if the anchor tenant actually has a 50% rent reduction this is relevant to purchasers).
• Similarly, unless the Side Letter excludes the Tenant’s successors in title, their assignees may benefit from the arrangements or concessions in it (so the Landlord could be tied into what has been agreed, e.g. a reduced rent, for much longer than it originally intended).

Termination

• A Side Letter needs to clarify how long the arrangement or concession will last.
• It should set out the circumstances in which it will end e.g. on an assignment of the lease.
• If the Side Letter can end on breach of its terms or the terms of the Lease, this should usually be on notice from the Landlord.

Does termination of a Side Letter amount to an unenforceable penalty?

• In the Vivienne Westwood Ltd v Conduit Street Development Ltd case, the Side Letter allowed for payment of a reduced rent, but in the event of a breach of the terms of the lease, the higher rent due under the lease was to be paid with retrospective effect. The tenant was late in payment of its rent and the Landlord sought the higher lease amount. This was found to be a penalty.
• This is a complex case and depended on specific circumstances, but termination clauses must be carefully worded.

Risks and Pre-Emptive Steps

• Side Letters are not registerable anywhere so can be more easily lost – it sounds obvious; but keep records.
• Side Letters are very useful tool but it is important to take legal advice on Side Letters which must be carefully drafted.

Kate Kurtz is an Associate Solicitor at Red Kite Solicitors and specialises in commercial landlord and tenant law and acquisitions and disposals.