Side letters are ancillary agreements often used in property transactions as a means to quickly document temporary, sensitive or bespoke arrangements that the parties do not want to include in the main document for commercial, legal, or practical reasons.
Disputes concerning side letters will often revolve around their legal status and enforceability which will depend on several key factors.
For a side letter to be legally binding, it must satisfy the principles of contract formation: offer, acceptance, the intention to create legal relations, certainty and consideration.
Intention to create legal relations
This means that the parties must have intended the side letter to be legally binding at the time it was made. In commercial property transactions, there is generally a strong presumption that both parties intend to create legal relations, particularly where the side letter deals with key terms such as rent concessions, use of premises or enforcement of lease provisions.
However, if the language of the side letter is vague as to the parties' intentions a court may find that there was no such intention.
Certainty
This means the obligations and rights must be clearly defined and not left open to interpretation or future agreement. If a side letter contains ambiguous language for example, referring to terms that are "to be agreed" or lacks essential details like timeframes, amounts, or specific actions, a court may find it too uncertain to enforce.
Consideration
Consideration is a fundamental requirement for the enforceability of side letters. It refers to something of value exchanged between the parties, which can take the form of a promise, an act, or forbearance. In the context of side letters in property transactions, consideration might include a tenant’s agreement to enter into a lease, perform certain obligations, or refrain from exercising a particular right, in exchange for a concession or benefit from the landlord, such as a rent reduction or waiver of a lease covenant.
Even nominal consideration can be sufficient if expressly stated. If no consideration is provided, the side letter may not be enforceable unless it is executed as a deed, which removes the need for consideration. Therefore, it is crucial that, where signed under hand, as opposed to as a deed, side letters clearly identify valid consideration to ensure they are legally binding.
Conclusion
It is worth noting that side letters are usually not appropriate where significant or permanent variations to a principal agreement are proposed. Where this is the case, it is usually recommended that the parties enter into a deed of variation, in order to provide legal certainty and if necessary, ensure that successors in title are bound by the arrangement.
In conclusion, while side letters can provide practical tools for flexibility and confidentiality, they must be carefully drafted. This is particularly important in commercial property transactions, where side letters often address significant matters like rent concessions or alterations to lease obligations. Legal advice is essential to ensure that the side letter is enforceable and reflects the true agreement of the parties. Failure to do so can lead to unintended legal consequences.
