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Rent side letters … how fashionable are they?

In a recent case, Vivienne Westwood Limited v Conduit Street Development Limited [2017] EWHC 350, it was considered whether terminating the rent side letter after a breach of the Lease was enforceable.

Vivienne Westwood Limited rented the ground floor and basement shop premises in London at a reduced rate as per a rent side letter to the Lease, which was agreed based on the fashion houses reputation. The side letter was personal to Vivienne Westwood Limited’s Lease of the premises and is considered to cease if the Lease was assigned to a new tenant or they ceased trading. This is a fashionable outlook as the reduced rent only stands for that particular tenant and upon assignment would cease to exist and the specified rent under the lease comes into affect.
So what is a rent side letter?
These are nominal considerations that are agreed by the Tenant and Landlord and personal to the Lease, these cannot be passed on to successors of the Lease. They are commonly used for rent payments and temporarily waives the Lease terms in respect of rent clauses in the Lease. Please note though the word “temporarily”; these do not permanently vary the terms of the Lease.
So if it’s not permanent how can I terminate the rent side letter?
A well advised Landlord would be prompted to include a termination clause to the side letter. Allowing the termination of the side letter following events set out within the prescribed clause.  The rent side letter in favour of Vivienne Westwood included the following termination clause;
“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 licence 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.”
So when Vivienne Westwood was considered to have breached the terms of the Lease following a non payment of quarterly rent following a recent rent review by the Landlord, increasing the rent due above the capped amount agreed in the side note. Notice was served for the side letter to be terminated immediately.
Ok, so the side letter was terminated and we revert back to the initial Lease … right? Not quite …
The court considered whether the termination of the side letter was a penalty to Vivienne Westwood Limited.  A penalty can be best described as a contractual provision that imposes a detrimental affect on a party following a breach of a primary obligation.
Vivienne Westwood Limited is primarily obligated to observe and abide by the clauses of the Lease. Although the side note does not vary the Lease it does change the primary obligations of the Lease in respect of those set out within the side note, in this case the clauses relating to rental income for the Landlord. Therefore Vivienne Westwood Limited is primarily obligated to observe the clauses within the Lease and those contained within the side letter. If the Landlord considers any of those primary obligations to be breached, Vivienne Westwood Limited would be obligated to perform as per the secondary obligations as set out within the served Notice.
The court found that the termination of the side letter was a penalty upon Vivienne Westwood Limited and would therefore be unenforceable. The side note was agreed upon on the basis of their reputation and it is favourable to the Landlord to have such a reputation renting from their premises. The primary obligations contained within the side note remained and are set to remain until they either cease trading or assign their Lease to another tenant as per the side letter.
If you are considering whether to offer your tenant a side letter in respect of rental income, it is important to ensure that any provisions for termination of the side letter would not be considered as a penalty upon the tenant.
Whether you are a Landlord granting a Lease, or a Tenant acquiring, with or without a side letter, it is imperative that you seek independent legal advice. Contact our Legal 500 recognised Commercial Property Team today on 0800 088 6004.