Rent concession letters – making sure you get the wording right

A bitterly contested dispute between the iconic fashion designer, Vivienne Westwood, and the landlord of her flagship Mayfair shop has highlighted the importance of taking great care when it comes to what is known as a 'rent concession side letter'.

The case recently ended up in the High Court and serves as a reminder to both landlords and tenants that the wording of these letters needs to be carefully considered to make sure they operate as each party wants them to.

What happened?

Historically, rent concession letters have been used by landlords and tenants to alter the payment provisions in the main lease and have been frequently used, particularly in tough economic times, to give the impression that top rents are being paid whilst behind the scenes, setting lower rents for tenants willing to take on the property.

In 2009, Vivienne Westwood Ltd - an extremely desirable, high profile tenant - entered into a 15 year lease of a ground floor flat and basement retail shop in Mayfair with landlord Conduit Street Developers Ltd. The rent payable under the lease was £110,000 per annum with upwards only rent reviews in 2014 and 2019.

At the same time, the landlord agreed to accept a lower rent from the tenant in a side letter personal to Vivienne Westwood Ltd, agreeing a reduced rent of £90,000 in the first year, increasing to £100,000 until the fifth year. The rent was the subject to an open market review in 2014 but capped at £125,000 for the following five years.

The termination provisions stated the agreement could be ended with immediate effect if the tenant breached the terms of the letter of the lease and following a rent review, and some confusion, the tenant's rent payment was late. The landlord then attempted to terminate the side letter and charge full rent of £232,500 per annum.

High Court's decision

In this case, the tenant argued that the termination of the side letter operated as a penalty and was void and the Court agreed, finding that the tenant's primary obligation was to pay rent at the lower rate agreed in the side letter.

In reality, in return for having a tenant with the worldwide reputation and kudos of Vivienne Westwood trading from the property, the landlord had agreed to accept a lower rent than it might otherwise have obtained.

If the primary obligation was breached, the Court decided, regardless of the nature and seriousness of such breach, the tenant would then be liable under its secondary obligation, to pay the higher rent reserved by the lease.

This provision made the higher rent payable in retrospect as well as in relation to future rent and also allowed the landlord to claim interest and costs incurred as a result of the breach and damage for losses caused by breach. Due to this, the Court found that secondary obligation was capable of being a penalty and was therefore void. The rent concession in the side letter therefore remained in force.

Rent concession letters are a common method of reflecting agreements in commercial property transactions. Landlords need to ensure that such letters do not impose terms which are too onerous or they risk the courts setting them aside in the case of a dispute.

For more advice contact Heather Jones, commercial property specialist and Head of Business Services and Commercial Property.