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It is common for commercial landlords and tenants to document agreements, different to those agreed in the lease, in a separate side letter.
One of the most common agreements seen in a side letter is that the tenant will benefit from a rent concession. The agreements contained in the side letter are often subject to certain conditions and the arrangement is, on the face of the document, terminable as set out in the letter.
The recent case of Vivienne Westwood v Conduit Street Development concerns whether a term entitling the landlord to terminate the effect of a side letter documenting a rent concession was enforceable.
In 2009, Vivienne Westwood Limited entered into a 15 year lease of a ground floor and basement retail shop in Mayfair. The rent payable under the lease was £110,000 per annum, with upwards only rent reviews in 2014 and 2019.
At the same time as the lease was entered into, the landlord agreed to accept a lower rent from the tenant and documented this agreement in a side letter. The side letter agreed a reduced rent of £90,000 in the first year, increasing to £100,000 until the fifth year of the term. The rent was then subject to an open market rent review in 2014, but capped at £125,000 for the following five years.
The termination provisions of the side letter stated that:
“If you breach any of the terms and conditions contained in this agreement or any term of the Lease and/or any document supplemental to it (for example a license to alter), we may terminate this agreement with immediate effect and the rents will be immediately payable in the manner set out in the Lease as if this agreement had never existed.”
The 2014 rent review was not carried out, but in March 2015 the tenant was invoiced at a rate equivalent to a rent of £125,000 per annum, which it paid in full. However, that the tenant failed to pay the June quarter’s rent.
As a consequence of the delayed June 2015 payment, the landlord notified the tenant that it was in breach of the lease and that the agreement in the side letter was terminated with immediate effect. The tenant then paid the arrears (calculated at £125,000 per annum) in full. The landlord accepted this in part payment of the arrears only, on the basis that the November 2014 rent review remained outstanding and the side letter agreement capping the rent at £125,000 had been terminated.
The open market rent was subsequently determined to be £232,500 per annum.
The key questions for the Court were whether:
The Court did not accept that anything in the landlord’s conduct amounted to an offer to agree the outstanding review at £125,000 per annum. However, the Court agreed with the tenant that the termination provisions amounted to a penalty and were therefore unenforceable.
In coming to this decision, the Court found that the tenant’s primary obligation was to pay rent at the lower rate agreed under the side letter. The true agreement between the parties was that, in return for having a tenant of the reputation of Vivienne Westwood trading from the property, the landlord agreed to accept a lower rent than it might otherwise have obtained.
If that primary obligation was breached, regardless of the nature and seriousness of such breach, the tenant would then be liable under its secondary obligation, to pay the higher rent reserved by the lease.
This provision made the higher rent payable in retrospect as well as in relation to future rent and also allowed the landlord to claim interest and costs incurred as a result of the breach and damage for losses caused by breach. Due to this, the Court found that secondary obligation was capable of being a penalty and the rent concession in the side letter therefore remained in force.
Although this case turned on its specific facts, in particular the wording of the side letter, it highlights the fact that a side letter may amount to significantly more than a conditional concession despite expressing that such letter does not vary the lease.
It is also a reminder that parties should not assume that a Court will give effect to whatever has been agreed between them even where, both parties were legally advised and in equal bargaining positions.
If you would like advice regarding side letters and other variations to leases, or dealing with disputes about such arrangements which are already in place, please do not hesitate to call a member of the Property or Property Litigation team at Myerson Solicitors on 0161 941 4000 or email us firstname.lastname@example.org and we will be delighted to help.