Side letters are a versatile tool in commercial property transactions, allowing landlords and tenants to document agreements that modify or supplement the terms of a lease.
Understanding the common uses and implications of side letters can help both parties manage their lease agreements more effectively.
Why do parties use a side letter?
Parties use side letters for various reasons, such as documenting temporary or personal arrangements, avoiding reworking approved documents or addressing last-minute changes. For example, a landlord may agree to accept monthly rent payments instead of quarterly payments, as required by the lease.
This arrangement can provide flexibility for tenants facing financial difficulties and help landlords maintain a steady cash flow. However, it is essential to ensure that the side letter clearly outlines the terms of the agreement to avoid misunderstandings and disputes.
When not to use a side letter
Side letters can be a convenient way to clarify or correct mistakes in a lease. Whether a side letter is appropriate depends on the nature of the mistake and its context within the lease. For example, side letters should not be used to extend the term of the lease or add additional property to the demise.
Instead, they can address minor errors or provide supplementary information. If the mistake is significant, the parties may need to consider rectification or other legal remedies, like the use of a Deed of Variation or even surrendering the agreement and entering into a new agreement that contains the correct agreed terms between the parties.
Registration of side letters
Side letters do not affect a registrable disposition and are not required to be registered at the Land Registry. This allows the parties to keep the contents of the side letter off the register.
However, whether a side letter is binding on successors depends on its construction rather than registration. A side letter may bind a buyer of the landlord’s interest if the benefit is not expressed to be personal to the landlord, even if the buyer is unaware of the side letter’s existence.
Binding successors
Determining whether a side letter binds successors involves a two-stage process:
- Interpretation
The drafting of the side letter will indicate whether it is intended to be personal or to bind successors. If the side letter is clearly personal, it will not bind successors.
- Transmission of covenants
If the side letter is intended to bind successors or is silent on the issue, the transmission of the benefit and burden of landlord and tenant covenants must be considered.
For new leases, covenants in a tenancy include covenants in a collateral agreement and bind successors, except for personal covenants. For old leases, covenants that “touch and concern” the land pass to successors.
Third-party implications
Whether a third party can enforce the side letter depends on its drafting. The relevant ‘rights of third parties’ legislation will apply, which can be of particular concern where associated companies might want to enforce the obligations in the side letter.
Key points to consider before entering into a side letter:
- 1. Personal or binding
Determine if the side letter is intended to be personal to the particular landlord/tenant or should bind their successors.
- 2. Legally binding
Ensure the terms of the side letter are intended to be legally binding on the parties.
- 3. Temporary variation
Clarify if the side letter documents a temporary variation and specify the duration.
- 4. Breach provisions
Define if the provisions of the side letter end if the tenant breaches any obligations under the lease or side letter.
- 5. Guarantor involvement
If there is a guarantor to the lease, they should also sign the side letter.
- 6. Lender consent
If the landlord’s property is subject to a charge, the lender should consent to the side letter.
Side letters are a valuable tool for landlords and tenants to manage and modify lease agreements. However, if not drawn up with the correct level of care, they can leave the parties trying to unscramble a confusion or to enforce a loosely attempted contractual relationship.
If you require further guidance regarding the use of a side letter or on commercial leases in general, please contact us to speak to a member of our Real Estate team.
