How to make a lawyer shudder with fear: side letter agreements

As lawyers, we are sometimes asked by our clients to carry out the “unthinkable”, in some cases we must refuse the request; in certain cases we must go further and refuse to act; but in a limited number of cases we can agree and we immediately move to a position of high alert, sometimes bemusement and sometimes fear. 

For lawyers that thrive on certainty, these agreements can have even the most unflappable individual shaking in their seat.  And what circumstances are these?  These are the times when we are asked to agree and document a separate arrangement that undermines the agreed terms of the main or existing deal that has been presented; the deal on the table as it were.  Such “off the table” arrangements are often documented by way of a side letter agreement which can be used to vary the terms of a contract usually for the original parties and no other. 

So why do we use them?  Side letters are a good way to offer or protect concessions which are personal to the existing parties but which should not be carried forward to provide a benefit to third parties which were not a party to the original deal.  This instrument is frequently used in the context of commercial leases and also in the context of rent concessions.

In a recent case decided by the High Court the issue of enforceability of such side letter agreements was brought in question and tested.

In the case of Vivienne Westwood vs. Conduit Street Developments Limited (2017)  the court was asked to consider the agreement reached between and Westwood and Conduit that capped the rent as determined by the main contract, the lease.

In 2009, as Landlord, Conduit had granted Westwood a fifteen year lease of property in upmarket Mayfair, at an initial rent of £110,000.00 per annum.  Despite the high level rent, the lease was on fairly standard terms with an upward only rent review on five yearly intervals.

The parties had also entered into a side letter agreement which had the effect of capping the rent from year 10 onwards at £125,000.00.  The concession was subject to agreed pre-conditions and terminable on breach of those pre-agreed terms (of the lease) including:

- Insolvency of the tenant;
- Assignment of the lease - meaning that the concession was personal to the tenant and which is not uncommon; and
- (by way of a catch-all provision) any other breach of the lease.

In 2014 following a rent review taking place, and with London land values as they have been in recent years, this resulted in a revised rent of £232,000.00. 

Westwood argued that the provisions of the side letter took effect and that the rent was therefore capped.  Conduit naturally opposed this, and went further stating that it had terminated the side letter agreement by a letter in 2015 when Westwood had fallen into arrears and paid rent late. 

The dispute reached the High Court where the judge was minded to side with Westwood and determined that the side letter was not terminated by the 2015 letter and reliance upon the catch-all provision, which was penal in nature, was unlawful.

Points for clients to consider

Although the case is subject to possible future challenge by Conduit, it highlights a number of important points to note for both landlords and tenants:

- The requirement for a tenant to operate strictly within the terms of the lease.  Had the side letter not been upheld by the court, then the resulting rent review would have increased Westwood’s rent by approximately 110% above the then passing rent;

- the importance of careful drafting with regards to any agreement, and not simply reserved to leases and rent concessions;

- the requirement to avoid unduly onerous clauses which could be held as unenforceable and/or indeed not to include penalty clauses which are ultimately unlawful; and

- the requirement to consider the changing market within which you are working especially when setting valuation-tied provisions.  It is unlikely that Conduit believed that the rent could have doubled in five years or it may not agree to cap the rent by reference to a fixed figure.

Should you have any queries in relation to this or any aspect of Commercial Property, then please contact Ian Bowker, Solicitor part of the Commercial Property Department at Terry Jones Solicitors on 01952 297979 or by email to: ianb@terry-jones.co.uk.

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