When negotiating a lease, a landlord may agree to certain concessions to attract and secure a desirable tenant. The agreement is often personal between the landlord and tenant, and documented by way of confidential side letter. In the recent case of Vivienne Westwood Limited v Conduit Street Development Limited  EWHC 350 (Ch) the decision of the High Court emphasised the importance of careful drafting when it comes to termination provisions in side letters and serves as a cautionary tale for landlords who routinely enter into side letters.
In 2009 Vivienne Westwood Ltd took a 15 year lease of high street premises in Conduit Street, London. A side letter to the lease contained provisions for reduced rent in the first five years, and then a cap on the rent following the first rent review in 2014. The agreement was personal to Vivienne Westwood Ltd. The side letter also contained termination provisions that gave the landlord a right to terminate the side letter, and demand the higher market rent backdated to the beginning of the term, if the tenant breached any of the terms of the lease, the side letter, or any supplemental documents.
Following successive changes of landlord, Westwood received two rent demands for differing amounts, which led to confusion. The situation was quickly resolved and the arrears paid, but the landlord served a notice terminating the side letter. This meant Westwood became liable to pay the full market rent, backdated to the beginning of the term.
Westwood sought a declaration from the court that termination of the side letter, and the retrospective requirement to pay the market rent amounted to a contractual penalty that could not be enforced. The case went before the High Court where the provisions contained in the side letter were considered alongside those in the lease. The court considered the following three part test:
- Was the requirement to pay the market rent a secondary obligation, triggered on the breach of a primary contractual obligation? The court concluded that the true bargain between the parties was a reduction in rent in return for the benefit of having a high profile tenant in occupation of the property. The construction of the side letter was held to create a primary obligation on Westwood to pay the reduced rent (and to observe the other terms of the lease) and so the requirement to pay the higher rent was held to be a secondary obligation;
- What was the nature and extent of the legitimate interest of the landlord? The landlord claimed a legitimate interest in the rent reverting to the market rent, but again, the nature of the bargain in obtaining a high profile tenant was considered by the court to be a key element of the relationship between the landlord and Westwood. Whilst the landlord was found to have a legitimate interest in the tenant paying the reduced rent as part of that bargain, they couldn’t argue a legitimate interest in the rent reverting to the market rent as this would be claiming a legitimate interest in the non-performance of the tenant; and
- Was the secondary obligation to pay the rent at the market level out of all proportion to the legitimate interest of the landlord? The retrospective element of the provisions were key here because the detriment suffered by Westwood in having to pay the market rent dating back to the beginning of the term was out of all proportion to the legitimate interest of the landlord.
The court held that the termination provisions amounted to a penalty that could not be enforced. The landlord was therefore obliged to observe the concessions in the side letter, despite it being terminated for breach. This will be a startling outcome for landlords if they have entered into side letters that contain termination provisions. They would be wise to review the construction and terms of those letters to ensure any future breach and subsequent termination would not result in the tenant still benefitting from the concessions of the side letter.
If you wish to discuss any of the issues raised in this article please contact Tamsin Mann, on 01872 227061 or firstname.lastname@example.org author of the article.
The information provided in this article is for general information purposes only and does not constitute legal or other professional advice and cannot be relied upon as such. Any law quoted in this article is correct as at July 2017. Appropriate legal advice should be sought for specific circumstances before any action is taken. Copyright © Murrell Associates Limited, July 2017.