Ensuring that side letters agreed don't come back to bite you

4 minute read
23 March 2020


Over the last week, many commercial tenants have been worrying about how they will pay a quarter's rent to their landlords given that tomorrow is the March quarter day. In these unprecedented times, many tenants have been looking at their cash flows (or lack of them) and making hard decisions about what they can pay. 

Landlords face not just immediate loss of income, but failed tenants means vacant premises with uncertainty over prospects to re-let and the costs associated with that. Many landlords are, pragmatically, looking to the longer term and are agreeing with their tenants temporary concessions on rent payment arrangements and other lease terms, e.g. by switching to monthly instead of quarterly rent payments.

Usually, temporary concessions to lease arrangements are dealt with by a side letter. To help speed up the process and to prevent you from agreeing something that may have inadvertent consequences, here are a few tips and things to check:

  1. Side Letter or Deed of Variation? A side letter is fine where you are documenting a concession that is meant to be temporary. If you are fundamentally changing the terms of the lease for the longer term, use a deed of variation or a supplemental agreement instead.
  2. Who is to be bound? Most side letters are personal to the tenant and the concession will no longer apply if the tenant assigns the lease. However, think about whether the landlord's successors should also be bound and expressly stipulate in the letter either way.
  3. Is there a pending rent review? If the lease has a pending rent review (which is not fixed, index linked or stepped), it is probably best to stipulate how the concession in the side letter will be dealt with on rent review - will it be disregarded?
  4. What happens if the tenant then breaches the terms of the lease/side letter, should the concession automatically end? It is tempting to stipulate this but, there may be a danger that the landlord could inadvertently waive the breach and jeopardise any enforcement action it may have.
  5. If the concession relates to reduced rent and the tenant is in breach of the lease, should the tenant have to pay the backdated higher rent? This is commonly agreed but landlords should be aware that it may be held to be an unenforceable penalty.
  6. Is the lease in question an underlease? Check, is the superior landlord's consent required?
  7. Is the landlord's interest in the property charged? Check, is the lender's consent required?
  8. Who needs to sign them? Side letters are legal arrangements that are intended to bind the parties. Make sure that the person signing the letter (or confirming in an email exchange) has the necessary authority to do so.
  9. Can they be dealt with by email? Yes, the email should be sent from the landlord (or the relevant professional advisor/managing agent) to the tenant and the tenant should be asked to reply to that email to confirm receipt and acknowledge the contents of the landlord's email.
  10. Does a Guarantor need to sign? Strictly, any guarantor should also agree the concession if it is a longer term concession that is effectively a variation, otherwise there is a risk the guarantor could be released from its liability.

NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.