Our legal experts, Baines Wilson give advice on how to handle side letters to leases.

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Side letters are commonly used by landlords and tenants to modify the terms of a commercial lease, either at the time when the lease is completed or at some later stage.

Their purpose is generally to confer a temporary concession on the tenant. Typical examples include reducing the rent for a fixed period, allowing rent to be paid monthly rather than quarterly or relaxing user provisions or restrictions on alterations contained in the lease.

While side letters provide a convenient way for the parties to temporarily and/or confidentially vary the terms of a lease, they are not without their problems and need to be used with care. 

The following are some key points to note:

  • If the concession is only intended to be temporary this needs to be made clear e.g. that it will last for a fixed number of years, until the happening of an identified event, or until the tenant assigns the lease (in which case the assignee will not benefit from the concession).
  • The concession will often be personal to the current tenant but it may still want to request that it will benefit other group companies in the event of an intra-group assignment.
  • The parties need to consider whether the concession will be binding on a future landlord if the current landlord sells the property (see below). The tenant is likely to want this but the landlord needs to bear in mind that it could affect the value of the landlord’s interest.
  • Landlords need to note that there is a risk that the variation to the lease terms could 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 obtain the guarantor’s consent to any variation to the lease whether formal or informal.
  • As a side letter is rarely executed as a deed, the parties need to ensure that there is “consideration” to make the agreement binding on the parties. Consideration is not an issue when the side letter is entered into at the same time as the lease because in this case the consideration will be the taking and granting of the lease. Where a side letter is given after the lease has been completed the concession could be given in consideration of something such as a nominal payment by the tenant to the landlord.
  • Any side letters entered into must be kept carefully with the lease and disclosed by the landlord to any prospective purchaser. Failure to disclose a side letter which will bind the purchaser could result in a claim by the purchaser for damages for misrepresentation after completion of the sale and the purchaser could claim for any losses it suffered as a result of having to honour the concessions in the side letter which the landlord had failed to disclose.

If a concession is agreed after a lease has been completed it may be tempting to try to deal with this yourself without involving a solicitor. However, this is not to be recommended. 

The above are some of the principal points to consider in relation to side letters but professional legal advice should always be sought so that all relevant legal and commercial issues relating to the particular matter can be addressed.

For help and advice in relation to the above or any other property topics please contact Sean Logue, Duncan Harty or Frances Richards on 01228 552600 or 01524 548494.