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MARCH 2011

Side letters are now commonplace in commercial property transactions.  However, care needs to be taken by the parties to ensure that the intended result is achieved.  They are not a panacea, though if used correctly can be a useful tool.

Side letters are often used to make last-minute alterations to a contract where it is not possible or convenient to amend the main document.  They are also used to grant legally enforceable concessions that are personal to the original contracting parties, to the exclusion of the relevant successors: for example to grant a personal exemption to the common obligation in a retail lease to insure the plate glass.

By contrast a comfort letter is not intended to create legally enforceable obligations and as a matter of good practice, it should expressly say so.

Parties should therefore first of all be clear as to whether what is being proposed is a side letter or a comfort letter.

When it comes to side letters to property contracts (such as an agreement for lease), if some terms must be in a side letter, then the side letter itself should be a contract (and therefore the usual requirements for this apply e.g. that both parties should sign the letter and that there should be some “consideration” in return for an obligation).  In addition either the main contract should state that all side letters are incorporated into it, or the side letter should incorporate the terms of the main contract.  Whilst the courts can rectify such a document if the parties were mistaken as to the meaning or effect of words used in a document, they will not rectify it if the legal consequences of that document are simply different to those intended.

Side letters to a disposition, most commonly the grant of a lease, are however binding without the need for express incorporation in the main document, provided there is nothing in that main document excluding side or collateral agreements.  To avoid confusion, such side letters ought only to deal with minor amendments to the main document, rather than sweeping changes.  In addition, careful thought needs to be given as to whether the terms in the side letter are intended to bind successors in title; and it is best to spell this out in the letter.

Finally, care also needs to be taken to ensure that the side letter, its status as a collateral agreement, and its content, are carefully flagged in any management summary and the deeds, so as not to be missed or forgotten about!

James Daglish
Senior Solicitor

 If you would like any further information about the issues raised in this article please contact James Daglish (jdaglish@gdlaw.co.uk), or any other member of Goodman Derrick LLP’s property department on 0207 404 0606.

This guide is for general information and interest only and should not be relied upon as providing specific legal advice.