Commercial leases: when to use side letters

A question we are often asked by our landlord and tenant clients is – we have agreed something with our landlord or tenant, do we need a deed of variation or can we just use a side letter in connection with our commercial lease?

The term "side letter" is often used, but actually has no official legal standing.

Side letters are often used as cost effective and speedy way to record an agreement about something arising in connection with the lease of a commercial property.  Their best use is as a cost effective and quick way to document something that is temporary in nature.

We often see them used for:

• A temporary rent concession – for example, if the landlord is doing work to the rest of the building which disrupts a tenant and offers a short rent reduction or rent-free period by way of compensation to the tenant.  Or a tenant is under temporary cashflow pressure, and at the tenant's request and to assist them, the landlord allows a short-term rent concession rather than seeing the tenant leave and be left with an empty building.
• An agreement to allow payment on a monthly basis rather than quarterly – not strictly a temporary measure but something that we often see documented as a concession to a particular tenant, rather than being documented in the lease itself.
• An obligation on the landlord's part to carry out some very minor works within a certain period of time – where the works are so minor and going to be carried out in such a short period that the parties feel anything more would be disproportionate.
• A temporary relaxation of a use covenant – for example, to allow a tenant a temporary ability to do something otherwise prohibited by the lease for a short period of time.  We have seen side letters of this type being used, for example, to allow a tenant to have a temporary extension of permitted hours of access to the premises to facilitate the tenant finishing an important contract.

To allow a tenant additional rights for a temporary period – such as for parking or loading and unloading.

A side letter here can be very useful – for example, if a tenant is carrying out works which the landlord has already consented to and where the tenant's contractors need the ability to park and receive deliveries on a short-term basis. 

If a tenant needs permanent parking or other rights, we always advise against a side letter. Side letters are best used for temporary matters, and if the subject matter is intended to be permanent or is of significant importance for either party, then a side letter is not the place for it.

Important points to consider here are:

• A side letter cannot extend the term of the lease or change the extent of the property comprised in the lease. If the parties want to do this, then many other technical legal and tax issues may come into play, and a deed of variation or supplemental lease is likely required instead. If the parties use a side letter for this it may not work or may in fact implement what is known as a "surrender and regrant" meaning that the current lease ends and a new one is put in its place. This brings with it all sorts of technical and tax issues that the parties usually want to avoid.
• If the lease is inside the security of tenure regime of the Landlord & Tenant Act 1954, then the parties need to think about what happens about the side letter if there is a renewal of the lease under that Act. If the side letter is recording matters which are a permanent change to the lease and which will need to be carried forward at any future lease renewal then a side letter is not the appropriate vehicle for this. A deed of variation should be used instead. If the parties use a side letter instead, there is a risk that these matters will not be carried forward as part of the renewal process and will be lost by the tenant.
• Is the side letter personal to the current landlord and the current tenant, or is it intended to bind and benefit their successors in title?   It is really essential to consider this point.  From a landlord's point of view, what is the potential effect of the side letter if they sell the property, or if they want to mortgage it? Will a future buyer or bank want to be bound by whatever is in the side letter, or will it, in fact, put off a future buyer or bank?  From a tenant's point of view there is a risk that if the landlord sells the freehold, the next landlord is not bound by the terms of the side letter. If future landlords are not bound by the side letter, then all the benefits of the deal the tenant has done with the current landlord will disappear, and be permanently lost if the new landlord does not want to continue them.
• If the lease has a guarantor, landlords should be very wary of documenting any agreement with the tenant by way of a side letter, as it may invalidate the guarantee. It is always preferable in this scenario to use a formal deed of variation of the lease instead.
• Permanent or significant changes to the lease must be documented formally using a deed of variation. This protects both parties and avoids expensive disputes in the future.
• Even if the parties do wish to use a side letter to document a temporary concession or similar matter – do bear in mind that side letters are not risk-free – they are still contractual documents and still need to be structured and drafted correctly to ensure that they are binding on both parties and do exactly what the parties want them to do. Drafted correctly, side letters can be a useful and cost-effective short-term fix but should not be used for anything substantial, of high value or of long-term significance.