Commercial Leases: What is a side letter?
What is a side letter?
A side letter is usually a short document that is ancillary to the main commercial lease, which is intended to vary, clarify or supplement the main lease terms. A side letter can be entered into at the same time as the lease is completed, or it could be entered into at a later date.
Why do parties use a side letter?
A landlord and tenant may agree to use a side letter for a number of reasons.
Sometimes landlords and tenants agree terms that are intended to be personal to that particular tenant, and if the tenant assigned or underlet the lease in the future, then the terms would no longer apply. Rather than documenting this in the lease, a side letter can be prepared, setting out the agreed terms, but making it clear that the terms will no longer apply if the tenant assigns or underlets the lease.
For example, most commercial leases require the annual rent to be paid quarterly in advance. However, a landlord may permit a particular tenant to pay the rent monthly. This could be documented in a side letter so that if the tenant assigned their lease, an incoming tenant would be required to pay the rent quarterly.
Side letters can also be used to deal with any last-minute changes to a lease. For example, if the parties have already arranged to sign the lease, but there is a small issue that could be documented by way of a side letter, rather than amending the lease itself.
Similarly, if the parties have agreed a temporary change to the lease, the simplest way to document this may be by way of a side letter, rather than a Deed of Variation to vary the lease terms. This is particularly the case where a lease is registered at the Land Registry. A Deed of Variation should be registered at the Land Registry, whereas a side letter cannot be registered.
Key points to consider before entering into a side letter
1. Is the side letter intended to be personal to the particular landlord/tenant, or should it be binding on their successors in title?
2. Are the terms of the side letter intended to be legally binding on the parties?
3. Is the side letter documenting a temporary variation? If so, how long should the variation be in place?
4. Will the provisions of the side letter end if, for example, the tenant is in breach of any of its obligations under the lease or side letter?
5. Is there a guarantor to the lease? If so, they should also sign the side letter.
6. Is the landlord’s property subject to a charge? If so, the lender should consent to the side letter.
If you require further guidance regarding the effect of the coronavirus on commercial lease terms or advice on commercial leases in general, please contact Rosie Edwards, Solicitor, or Daniel York Partner, in our Real Estate department or email your query to email@example.com; call us on 01276 686222 or visit our website https://www.herrington-carmichael.com/contact/
This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.
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