The recent High Court case of Vivienne Westwood Limited v Conduit Street Developments Limited has highlighted care should be taken when entering into rent concession side letters.
Rent concessions in side letters
Side letters providing rent concessions are often used by landlords and tenants to alter the payment provisions in the lease. In the credit crunch they were frequently used to maintain headline rents for properties whilst behind the scenes setting lower rents for tenants willing to take on the property. Their benefit is that they are usually expressed to be personal, so that a landlord will be able to charge the full lease rent if and when a tenant assigns their interest. However, care needs to be taken to ensure the investment value of the Landlord’s property is protected.
Termination provisions in side letter operated as a penalty and were void
Side letters often include provisions enabling the landlord to terminate them if the tenant breaches the terms of the letter or the lease. Such a clause was at the centre of this case, and was found to be void as the court found that it operated as a penalty.
Vivienne Westwood Limited agreed terms for a 15 year lease with five yearly rent reviews. In a side letter, the landlord agreed it would accept a reduced rent for the first 10 years of the lease, with the rent subject to a cap after the first rent review. The side letter was expressed to be personal to Vivienne Westwood Limited. It could be terminated in certain circumstances, including if there were any breaches of the terms of the lease.
Following a rent review, there was some confusion over the amount of rent that was due and the tenant’s rent payment was late. The Landlord attempted to terminate the side letter and charge full rent.
The Tenant successfully argued that the termination of the side letter operated as a penalty and was void.
The judge looked at the lease and side letter and found the tenant’s primary obligation was to pay rent at the reduced rate specified in the side letter. The obligation to pay the full rent in the lease that would arise if the side letter was terminated for a breach of any terms or conditions was a secondary obligation, and triggering this secondary obligation operated as a penalty as the impact on the tenant was disproportionate.
In deciding that the termination provisions operated as a penalty, the judge took into account that the termination clause in the side letter acted prospectively and retrospectively- meaning a breach by the tenant and termination of the side letter would require them to pay not only full rent in the future, but also all the rent differential from having paid a reduced rent in previous years.
The case reminds landlords and tenants that they need to consider the wording of such letters very carefully to make sure they operate as they want them to.
In addition to all the other issues that landlords need to consider, such as whether concessions are to be personal to the tenant, whether they are to bind the landlord’s successors in title, the impact the side letter may have on the liability of a tenant’s guarantor, landlords and tenants going forward need to consider the effectiveness of any termination provisions.
As a minimum, it is in both parties interests to ensure that any termination provisions included in a side letter are proportionate and, in the case of rent concession letters, to ensure that in the event of termination, adjustments are only required to the rent payable after the date of termination and are not retrospective.
If you would like to discuss any of the information included above, please contact Joanne Wright, Partner from our Commercial Property & Development team on 01892 701164 or by emailing email@example.com.