Side letters are useful but they should be treated with care. Whilst the Lease reflects the deal between the landlord and the tenant, that deal is sometimes modified by a side letter which records the “real deal” the parties have struck.
It is common place for rental concessions to be located in a side letter thus making that arrangement private and personal to the tenant whilst also reducing the risk to the landlord of adverse comparable rent evidence on review.
Such side letters usually set out when the arrangement can be terminated by the landlord. Typically this will occur if the tenant disposes of its lease or ceases to occupy for some reason.
The side letter may provide that the landlord can terminate if the tenant breaches the terms of the lease or side letter.
A recent case has made it very clear that this is where landlords need to tread carefully.
In Vivienne Westwood Limited –v- Conduit Street Development Limited the rental concession took the form of a reduced level of rent and a cap at review. The landlord could end this concession if the tenant breached any of the terms of its lease or the side letter. If termination occurred the headline lease rent was payable both retrospectively and going forward, in addition to all the usual landlord’s remedies for breach including interest.
The Court decided that in this instance this amounted to a contractual penalty as the financial consequences of termination visited upon the tenant were disproportionate and exorbitant. As penalties are legally unenforceable the landlord could not terminate the side letter for breach and the tenant was free to continue to enjoy the rental concession.
The lesson for landlords seems to be draft your termination provisions moderately and sensibly. Avoid retrospective consequences of termination and give yourselves remedies that are proportionate and fair.