Side letters (aka collateral contracts) are a device sometimes used by lawyers to document concessions or assurances made by landlords to tenants. These assurances can range from the minor to the serious and can be drafted as personal to a tenant, or can bind successors.

An example of an assurance which formed the basis of a recent Court of Appeal case covered a situation where the landlord struck a deal with its tenant to exclude the tenant’s liability for dilapidations and reinstatement at the end of its so-called full repairing lease. This, in exchange for the tenant giving up its lease renewal rights and taking a shorter lease.

The problem arose because although the heads of terms clearly stated that the assurance was a term of the new lease, the landlord’s rather tenacious solicitor refused to include any wording in the lease or give a formal side letter. Instead, on being asked to enter into a formal side letter or dilute the dilapidation provisions, the tenant was told by the landlord’s solicitor in pre-completion correspondence marked “subject to contact” that:

“... my client has already indicated to your client that a terminal schedule of dilapidations will not be served and this should be satisfactory comfort for your client.”

The tenant decided to rely on this assurance and walked away with neither a signed side letter nor with any amendments made to the completed lease.

By the time the tenant operated its break notice, the landlord had created an intermediate long lease interest to sell on to a third party, who became the tenant’s new immediate landlord. As this third party eventually became the claimant, and the tenant became the defendant, you might gather things did not go to plan; namely, the new landlord served a schedule of dilapidations on the tenant.

The tenant argued that assurance provided by the landlord’s solicitor was a collateral contract and as a result, this bound the new landlord from serving such a schedule.

The High Court agreed with the tenant “on the narrowest of margins” but on appeal, this was overturned. The reasoning given turned very much on the facts. The assurance provided in correspondence by the previous landlord’s solicitor had been overtaken by the subsequent negotiations. Moreover, the completed lease, which had no reference to the concession, showed the clear intention of the parties. To decide otherwise, would have been “wholly uncommercial”.

If you are buying an investment property, the due diligence may need to probe further than examining the deeds in the title pack. Specifically, the seller needs to be asked if there is anything that has been agreed which has not been reflected in the lease. It is worth noting that plastering ‘subject to contract’ all over correspondence does not, on its own, prevent a collateral contract from being formed if the facts of the case as a whole indicate the intention of the parties to be otherwise.

As a tenant, the first rule must be that if any assurances are to be made, put it in writing. Make sure that the side letter refers to the lease it is collateral to, contains all the arrangements you wish to rely on and that it binds successors - and watch out for those troublesome ‘entire agreement’ clauses in the lease which may obliterate the side letter’s existence.

All this goes to show that a bit on the side might not always be the answer.