Side Letters - Handle with care!
- AuthorJames Ballaam
“Can’t we just do a side letter?” are words a Commercial Property solicitor will no doubt hear countless times throughout the year.
However such requests need to be handled with the utmost care and caution to ensure your client is not left in a precarious situation, irrespective of whether your client is a landlord or tenant or successor to either.
Side letters are usually prepared to offer personal concessions to a tenant that the landlord would not want to be recorded in the lease itself, or cited in a document available to the public via the Land Registry, the most common being a reduction in rent or relaxation of a clause of the lease.
Typically such letters are personal to the parties meaning that the concessions enjoyed will fall away if and when the parties cease to be landlord and tenant.
When acting for either a landlord or a tenant care and diligence are fundamental when drafting side letters. The surrounding context and circumstances to the lease need to be carefully considered. What if a tenant company is bought out via a share sale? What if the tenant breaches covenants contained in the lease or in documents ancillary to the it?
Effective side letters will consider such things and make the concession contingent on the tenant complying with its obligations. If the tenant fails to do so the landlord must be able to withdraw the concessions.
Yet even this must be handled with caution. Recent case law has demonstrated that courts are prepared to intervene when side letters are construed as “landlord biased”, the most recent being Vivienne Westwood v. Conduit Street Developments Limited (2017).
The thought process behind this is that if the penalty for a breach of a covenant or obligation is deemed sufficient, usually payment of interest or costs at an indemnity rate, then the withdrawal of the side letter concession due to the same breach may be deemed excessive. Unusually onerous clauses should therefore be avoided.
In such cases the court can effectively strike-out provisions of the side letter to allow the concession to remain binding. Regard must be taken to the seriousness and frequency of the breaches contained in the side letter.
When acting for a tenant it is key to request that the side letter be drafted so that it is binding on the landlord’s successors in title, otherwise you could find yourself faced with a very unhappy client who has been hit with a rent demand far in excess of what they are used to because of a change in landlord.
This will inevitably lead to a landlord and tenant dispute and may result in a negligence case against the firm. Such agreements however will ultimately depend on whether the landlord is prepared to offer this concession. Many may not but it is entirely a matter for negotiation.
When acting for a landlord it is important that side letters are disclosed when disposing of an interest in the affected property. Failure to do so could lead to a claim for misrepresentation and the subsequent payment of damages.
In summary side letters must not be dealt with nonchalantly. The implications to your client must be considered in full. There are technical legal points which must also be considered.
There must be some form of consideration for the concession even if it is a “nominal payment”. In situations where the side letter is entered into at the same time as the lease the taking on of the lease itself will be deemed sufficient.
The side letter must also be listed in the “entire agreement” clause should the lease contain one, if it is entered in to prior to or at the same time as the lease.
Similarly when you have an agreement for lease and a side letter simultaneously both must refer to each other in the body of the respective document. Failure to do so could invalidate both documents as all terms of an agreement for lease must be contained in a solitary document signed by both parties pursuant to s.2 Law of Property (Miscellaneous Provisions) Act 1989.