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The High Court has recently considered whether the termination by a landlord of a side letter, which allowed its retailer tenant to enjoy a reduced rent, was a penalty.
When the Lease was granted the initial rent was £110,000 per year, subject to reviews every five years. A side letter which the landlord granted to the tenant allowed the tenant to pay a reduced rent for the first five years and also said that if the open market rent payable after the first review was more than £125,000 the tenant’s rent would be capped at £125,000 for the following five years. The letter said, however, that it could be terminated with immediate effect if the tenant breached any of the terms of the letter or the Lease.
The tenant was confused as to the correct rent payable, which resulted in it missing a quarter’s rent in June 2015. The upshot was that the landlord terminated the side letter.
One of the issues the Court had to consider was whether the landlord’s right to terminate the side letter was an unenforceable penalty clause.
The High Court decided that the effect of termination was a penalty because:-
A point to note for landlords is that it may be sensible to draft side letters so that the requirement to pay rent at the higher level in the event of a breach only operates for the future and not retrospectively.
For further information please contact James Staton, Partner, Litigation.