Side letters are documents in the form of a letter, signed by the sender and recipient, which are ancillary to main documents such as a lease. They are commonly used by landlords and tenants to modify the terms of a lease on or after completion. Their purpose is generally to confer a temporary concession on the tenant. Examples of this include reducing the rent for a fixed period without affecting comparables for rent reviews on other leases or relaxing restrictions on alterations or user provisions in the lease.

While they undoubtedly represent a convenient process by which the parties can seek to temporarily or confidentially vary the terms of a lease, they are not without their problems. If side letters are to be used, both landlord and tenant should understand how they operate and draft them accordingly. Furthermore, once signed, they should be carefully kept and disclosed so that any prospective purchaser of the landlord’s interest or assignee of the lease can properly assess how they might be affected by the terms of the letter.

Getting the basics right

  • If the concession is only intended to be temporary, the side letter should clearly state that this is the case, i.e. that it will last for a fixed number of years, until the happening of a defined event, or until the tenant assigns the lease, in which case the assignee will not benefit from the concession.

  • If the concession is intended to be personal to the current tenant, it may nevertheless want to request that it will cover other group companies in the event of an intra-group assignment.

  • The parties should also consider whether the concession will be binding on a future landlord if the current landlord sells the property (see below). The tenant will naturally want the concession to continue but, if it does, it could affect the value of the landlord’s interest.

  • The landlord should consider whether the variation contained in the side letter will result in inadvertent discharge of any guarantees. Although the concession may be insubstantial and may not adversely affect the guarantor, it is always advisable to secure the guarantor’s consent to any variation to the lease.

  • As a side letter is rarely executed as a deed, the parties will need to ensure that the concession is “in consideration of” something such as a nominal payment by the tenant to the landlord. The need for this should not arise if the side letter is agreed at the same time as the lease is granted (in which case the “consideration” will be the granting and taking of the lease).

  • If the lease contains an “entire agreement” clause, the parties should ensure that a side letter agreed at or prior to completion is listed in the entire agreement statement.

  • If a side letter accompanies an agreement for lease, particular care should be taken to comply with section 2 of the Law of Property (Miscellaneous Provisions) Act 1989. This requires all the terms of the agreement for lease to be contained in a single document signed by both parties. Both the agreement for lease and side letter should refer to each other, failing which both may be invalidated under section 2.

Are the landlord’s successors in title affected?

Particular care needs to be taken to ensure that a future landlord is not bound by the concession in the side letter:

  • In System Floors Ltd v Ruralpride Ltd (1995) the Court of Appeal considered whether the terms of a side letter bound the successor in title to the original landlord. The letter clearly stated that the concessions in it were personal to the tenant but it did not expressly state whether or not subsequent landlords would be bound by the concession. The original landlord sold its interest but the purchaser was not told about the letter before completing the purchase. The court held that the purchaser was bound by the side letter.

  • In Lotteryking v AMEC Properties (1995) a similar conclusion was reached. The landlord had agreed to carry out works to remedy damp found shortly before the grant of the lease and to reduce the rent while the works were being carried out. Before carrying out the works, the landlord attempted to sell. The court held that the tenant would not be required to pay rent to a new landlord until the works had been done.

Both cases related to leases granted before the Landlord and Tenant (Covenants) Act 1995 (the “1995 Act”) came into force. The relevant statutory provision affecting the liability of a future landlord in relation to pre-1 January 1996 “old” leases was section 142 of the Law of Property Act 1925. It is likely that side letters affecting post-1 January 1996 “new” leases would be treated in the same way because of section 3 of the 1995 Act.

Disclosure of side letters

Since side letters commonly bind the landlord’s successors in title, it is essential that they are disclosed by the landlord to a prospective purchaser. Accordingly, care should be taken to keep any side letters with the lease. Failure to do so could result in a claim by the purchaser for damages for misrepresentation after completion of the sale and purchase. The purchaser’s claim will be for the losses it will suffer by reason of honouring the concessions in the side letter which the landlord had failed to disclose.