When a personal side agreement becomes part of a lease
By Patrick Ahern
6 April, 2017
Landlords, tenants and advisors alike should note the outcome of a recent English High Court decision as regards the nature and operation of a ‘side letter’ to a commercial lease. Caveats are that English decisions are not binding on the Courts of Ireland although our landlord and tenant laws and principles overlap to a large degree, and that, when considering disputes arising from an often complex mix of facts, documents and intentions, the courts (and us lawyers) will stress that decisions are made ‘on their own facts’.
Below are some brief points for landlords, tenants or advisors to consider in respect of any side letters for release. The points arise from a 2017 English High Court Judgement, Vivienne Westwood Limited v. Conduit Street Development Limited.
- 15 year lease from 2009 with upwards only rent reviews to take place in 2014/2019.
- Landlord and tenant entered a personal side agreement at the outset and agreed a reduced rent (vis-à-vis the lease) on a stepped basis, and capping whatever rent might be reviewed in 2014. Specifically the agreement was stated not to be a variation of the lease terms itself.
- Specifically, the side letter also stated that if there was any breach by the tenant of the terms of the side letter of the lease itself or of any supplemental document, the landlord could immediately terminate the agreement as if it had never taken place (thus allowing the landlord retrospective recovery for the full reserved rent and so forth).
- In the absence of any 2014 rent review, the landlord invoiced the tenant for rent in 2015 at the “capped” level agreed in the Side Agreement. When the tenant did not pay the second quarter so billed on time, the landlord wrote, terminating the Side Agreement and seeking full review of the rent to open market value.
That invoicing for the amount of the capped rent was not an acknowledgement that this was the rent under the 2014 review (which had not taken place).
Court Finding 2
The Side Letter amounted to a variation of the tenant’s primary obligations under the Lease, not just a “Side Agreement” over and above the main agreement. Furthermore, the termination provision in the Side Agreement having retrospective as well as future effect amounted to a penalty, of a nature which would not be enforceable if it was in the lease itself.
Lessons to be learnt
Consider carefully whether a proposed Side Agreement does in fact amount to part of the overall “bargain” between the parties at the outset; whether any termination should allow retrospective sanction; and whether the consequences of termination are disproportionate to the breach.