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Side Letters – warning to landlords

Napthens - May 3rd 2017

The recent case of Vivienne Westwood Limited v Conduit Street Developments Limited could have a significant effect on the application and enforcement of Side Letters to commercial leases.

Vivienne Westwood Limited had agreed a lease with 5 yearly rent reviews and the Side Letter contained a provision that the landlord would accept a lower rent for the first 10 years of the term of £125,000 per annum.

The landlord had seemingly agreed to the lower rent in return for having a prestige tenant.  The landlord had, however, reserved the right to terminate the Side Letter if there was a breach of any of the terms of the lease.

The rent was paid late and therefore the tenant was in breach of the lease. The landlord terminated the Side Letter agreement and following a Rent Review the landlord increased the rent to £232,000 per annum.

The tenant disputed the termination of the Side Letter and asserted that termination was a penalty which would render the termination void.  The tenant’s argument was that their 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 the rent would remain at £125,000 per annum.

Ideally landlords should avoid using a Side Letter and should include all Covenants and Terms in the lease. If a Side Letter is used then landlords must be aware that they may not be able to separately terminate the provisions of a Side Letter for a tenant’s breach of the lease (or any other reason) since the Side Letter in effect varies the primary lease obligations.

Landlords should review any Side Letters that are in place with tenants to ensure that they will not be subject to the decision in Westwood if they exercise a right to terminate.

Tenants can argue that the decision in Westwood enables them to continue with the agreement set out in the Side Letter despite their breach of the lease.

The case of Westwood is complex and if landlords or tenants have any concerns about the provisions of a Side Letter or a lease they should seek legal advice.