Vivienne Westwood Limited v Conduit Street Development Limited  EWHC 350 (Ch)
It is quite common for rent concessions to be documented in side agreements. This helps keep arrangements confidential and personal to the tenant in question. In turn this helps landlords manage the risk of adverse rental evidence for other lettings or rent reviews. The arrangements may provide for termination by the landlord if the tenant breaches the terms of its lease.
The termination provisions in a side letter between original landlord and its tenant, Vivienne Westwood, were found to be void and unenforceable as it operated as a penalty. This meant that Vivienne Westwood could enjoy the benefits of the significant rental concessions contained in the side letter for as long as it traded from the premises as the tenant, without fear of termination.
The side letter provided for fixed lower rental payments for the first 5 years of the term and then a cap of £125,000 per annum for the next 5 years if the open market rent at review was found to exceed that sum. It also clearly set out that if the tenant breached its terms or the lease, the landlord could terminate the agreement and rent will be immediately payable in full.
The landlord, Conduit Street Development Limited, argued that the side letter had been terminated in July 2015 following the tenant’s failure to pay the June 2015 quarter rent. The tenant argued that the landlord’s right to terminate was a penalty and therefore unenforceable.
To be a penalty the clause needed to satisfy certain principles. Key was that the clause needed to impose on the tenant financial consequences for the breach of a primary obligation, causing a detriment to the tenant disproportionate to the landlord’s interest in performance of that primary obligation.
The Court decided that the side letter and lease, being entered into at the same time and between the same parties, should be read as one document. Their combined effect was that the tenant’s primary obligation was to pay the reduced rent with a default to the higher rent specified in the lease on breach.
The Court found that if triggered its effect would be both prospective and retrospective. Meaning that the tenant would not only need to pay the headline rent (as reviewed) from the termination of the side letter but also the additional rents for the years which had passed.
This default to a higher rent and obligation to pay retrospectively was found to be a disproportionate detriment to the tenant for the breach of the primary obligation and the clause was therefore void.
- When drafting termination clauses in such agreements going forward it might be sensible to provide expressly that rent will only revert to the headline rent on breach going forward and not also retrospectively.
- As landlords review the terms of their side letters to assess any weaknesses the case should not be taken as a guarantee that termination clauses in them would be unenforceable but does highlight that careful thought should be given to their use and their terms.
- “Penalty” consequences may look attractive to the party that benefits from them but the law in England and Wales has never allowed them to be enforceable. Interestingly, the forfeiture of the usual 10% deposit for the purchase of land is treated as a special category, and does not operate as an unenforceable penalty.