Should Side Letter Concessions be used by Landlords?

When leases are negotiated it is not uncommon for tenants to have certain demands, especially in the context of retail leases. For example retail tenants will often (whether or not they are household names) have a number of standard requirements which will have to be met before they will take the lease. Landlords may prefer to record such requirements in a document that need not be lodged at the Land Registry (normally because the terms are confidential and neither side wants them in the public domain and also because the intention is that they should not benefit any other party, for example if the lease is later transferred in the future). The answer therefore is that on occasions side letters will be useful and are not uncommon.

If Side Letters are used what are the main things to watch out for?

Care needs to be taken by Landlords when agreeing a side letter. The main points to note briefly are:-
 

  • The side letter should be personal to the tenant and not capable of benefitting any transferee of the lease
  • That should include reference to any transfer of the shares of the tenant (if the tenant is a company)-as otherwise it would be a “back door” way for the tenant to transfer the benefit of the side letter
  • If the side letter deals with a reduced rent applying for the tenant, either for so long as it is tenant or for a fixed initial period of the lease, then provision should be made for the reduction to be dissapplied if the tenant is in breach of any of its obligations in the lease
  • Care should be taken to ensure that the punishment for breach is proportionate-if the side letter effectively allows the landlord to reinstate the rent to the correct level for minor breaches of obligation, then this might not be upheld by the courts (because the lease will include provisions giving the Landlord other remedies for minor breaches ,such as being able to charge interest etc). So breaches should be referred to as substantial/persistent etc

The Moral of the Story?

If negotiating a side letter it is always prudent to consult a solicitor and only to agree heads of terms subject to approval by solicitors.

Should you have any queries or if you are considering whether to agree a side letter a lease and need advice with regard to heads of terms please contact Carlo Sereni (Head of Commercial Property) on 01743 285861 or by email to: carlos@terry-jones.co.uk

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