A recent decision of the High Court in Vivienne Westwood Limited v Conduit Street Developments Limited  highlights the importance of careful consideration of the terms to be included in any side letter between landlord and tenant.
Vivienne Westwood entered into a 15 year lease of a retail property in Mayfair in 2009 at an initial rent of £110,000 with upwards-only rent reviews in line with the open market in years 5 and 10. Contemporaneously a side letter was entered into which, from year 10 onwards, capped the rent payable at £125,000. The Side Letter was automatically terminable on breach of specified conditions (such as assignment of the lease and the tenant becoming insolvent) and contained an additional termination right in the event of breach of any term of the Lease.
In 2014, the open market rent was agreed at £232,500. Westwood argued that the rent payable was subject to the £125,000 cap as set out in the Side Letter. The landlord however relied on the fact that they had terminated the Side Letter, by letter to Westwood in 2015, when Westwood had been in breach of the terms of the Lease by failing to pay rent on time. The Judge found for Westwood, holding that their rent remained capped at £125,000, on the basis that the provision in the Side Letter allowing termination for any breach of the Lease was penal in nature. As such the landlord’s earlier attempt to terminate the Side Letter was unenforceable.
The judgement heavily centres on the precise wording of the drafting of this particular side letter and is as such, to an extent, confined to its facts. Furthermore, there is some scope for argument that the reasoning is inconsistent with the Supreme Court decisions in Arnold v Britton and Makdessi v Cavendish Square Holdings BV ParkingEye Ltd v Beavis. However, the decision does emphasise that landlords are well advised to steer clear of unduly onerous terms when drafting rent concessions in order to avoid the risk of such terms being considered penalties and therefore unenforceable.