What is a Side Letter?
In the realm of commercial property lease transactions, side letters are often overlooked but can play an important role in ensuring a successful deal.
A side letter is a supplementary contractual agreement between the parties involved (which is intended to be legally binding between them) that outlines a small number of supplementary arrangements in connection with a lease which do not require a formal variation of the lease. These agreements can address a variety of issues, including (by way of examples):
- Rent concessions: For example, the landlord granting certain rent concessions to the tenant for a limited period of time
- Tenant improvements: Commitments from the landlord to make specific improvements to the property before or during the tenancy
- Right of first refusal: Giving the tenant the right to purchase the freehold of the property before it is offered on the open market
- Financial incentives: Offers of tenant improvement allowances or other financial incentives to attract tenants
- Dispute resolution: Specifies alternative dispute resolution methods, such as mediation or arbitration, to avoid costly litigation
Why would parties need a Side Letter?
One might ask why a side letter would be required and why these changed terms cannot be drafted directly into the Lease? The answer to this is that sometimes the parties arrange a personal concession to the current tenant, that the Landlord does not want to extend to future tenants – and so a side letter offers a way of granting this concessionary arrangement but without altering the terms of the Lease itself.
Similarly, for a variety of reasons, the Landlord may prefer the Lease to be drafted in a more institutionally standard way 'on the face of it' and to keep any deviations or changes in this side arrangement.
Important to Note
Side letters cannot be used to circumnavigate existing obligations the parties may have to any third party in relation to a Lease. For example – if a tenant is wanting to sublet its space in such a way that does not comply with the obligations in its own lease, it cannot put in place a side letter with the proposed subtenant to avoid or get around these restrictions, without disclosing such an arrangement to the superior landlord. Full transparency and openness about the existence and content of any side arrangement must be disclosed to all relevant parties in a transaction (including any lenders or superior interests).
Enforceability of Side Letters
Although the usual intention is that side letters will create legally enforceable rights and obligations, this is by no means guaranteed, even if the document is entitled "side letter".
A court is unlikely to enforce a side arrangement if the key commercial terms are still being negotiated between the parties.
A side letter is a contract and so consideration (payment, in any form, under the contract) must be provided. In practice, if a side letter clarifies details relating to the Lease or to document agreed changes then this requirement for consideration is satisfied as the benefit to both parties is evident. If consideration is not provided, a side letter will not be binding unless it is executed as a Deed (a written document, executed in a specified formal way which goes further than a simple signature).
Importance of Legal Advice
While a side letter can be a valuable tool in commercial property lease transactions, it is important to ensure their enforceability as a separate contract between the parties, by making sure that the drafting complies with usual legal contract obligations.
When drafting or reviewing a side letter, it is crucial to seek legal advice from experienced commercial property lawyers. They can help ensure that the side letter is enforceable, protects your interests, and complies with all relevant laws. By understanding the importance of side letters and taking the necessary steps to ensure their enforceability, you can increase the likelihood of a successful commercial property transaction.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
