Beware Side Letter
Although the case of Vivienne Westwood Limited v Conduit Street Development Limited is fact specific it is a crucial reminder of the care that must be taken when setting out concessionary terms in side letters between landlords and tenants.
In 2009 Vivienne Westwood Limited entered into a 15 year lease of retail premises, however at the same time the parties entered into a side letter providing rent concessions. The lease provided that the annual rent payable was £110,000 with upwards only rent reviews in 2014 and 2019. Under the side letter the landlord conditionally agreed to accept a reduced rent of £90,000 up to £100,000 in year 5. It was further agreed that the rent would be capped at £125,000 for the following 5 years if the rent review in 2014 determined that a higher open market rent would have been payable.
The side letter was personal to Vivienne Westwood Limited, and could be terminated by the landlord if there was any breach of the side letter or the lease. Were this to happen the rent would be immediately payable as per the lease as if the side letter had never been agreed.
In 2015 Vivienne Westwood Limited paid the rent late, and the landlord purported to terminate the concessions in the side letter with immediate effect arguing that therefore the open market rent was payable.
If the landlord’s right to terminate the side letter for any breach of the lease amounted to a penalty it would unenforceable under contract law.
The Court held it was an unenforceable penalty as paying the reduced rent was the primary obligation, and paying the full rent was a secondary obligation. It was also held that the consequences of the tenant having to pay the higher rent retrospectively as well as in the future for any breach of the lease was disproportionate to the legitimate interest the landlord had in Vivienne Westwood Limited complying with its obligations.
It is important for landlords to consider very carefully whether any conditional concessions in a side letter may change a tenant’s primary obligation even when it does not expressly vary the lease, and also whether the consequences of default could result in same being held as a penalty and therefore unenforceable.
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