Side Letters: Are they worth the paper they are written on?
There is a grey area as to what a side letter is in law, and whether one should be used. Dean Bickford, a partner in our Real Estate team, explores some of the issues to bear in mind when a side letter is to be used.
We are regularly asked to document a variation or clarification to a contract or lease by drawing up a side letter, sometimes at the last minute. They are seen as a convenient way of dealing with particular issues, often at the point of completion or exchange. It may be for example, because the side issue is only temporary, or personal, or to avoid re-working an approved and signed fair copy document. This is a hot area right now, as lots of tenants are asking landlords for concessions to help to soften the terms of their existing leases during the slow-down caused by the covid-19 pandemic.
However, how enforceable are they? What are the consequences of using side letters, and are we just muddying the issue?
The first point, which often can cause uncertainty, is “how enforceable is a side letter”? Simply put, if you want the side letter to be legally enforceable, it must follow the requirements for creating a contract. If it does, then enforcement shouldn’t be a problem. It is worth making it clear in the side letter if all or some (or indeed none) of the terms are intended to be legally binding.
The judicial interpretation of a side letter will be done in the same way as it is with any contract. The words used are paramount, so say what you mean, in clear terms. If there are any unclear provisions in the letter, the courts may look to extraneous evidence, for example any contract that the side letter relates to, in order to make sense of it. However, the courts will not re-write the side letter and it may be rendered unenforceable if it is non-sense, so look out for vague or uncertain provisions.
3. Third party implications
Whether a third party can enforce the side letter will depend on the drafting. Where it is a contract, the relevant ‘rights of third-parties’ legislation will apply. This can be of particular concern where associated companies might want to enforce the obligations in the side letter. It will also be of concern to future owners/occupiers, looking to benefit from concessions or obligations agreed by their predecessors.
4. Unintended consequences
Where the side letter is intended to vary the main contract, without careful thought this could result in the inadvertent release of a guarantee. This may be the case even where the variation does not directly impact on the guarantor’s obligations. Conversely, the side letter may create a contractual relationship where one was not intended.
At the risk of stating the obvious, the effectiveness of the side letter will depend on its drafting. What can seem like a simple short-hand way of addressing an issue or clarifying a point, often prepared last minute at short notice, can create more problems than it was intended to resolve.
Overall, side letters can be a very useful tool and an efficient and effective way of achieving an outcome. However, if not drawn up with the correct level of care, they can leave the parties trying to unscramble a confusion or to enforce a loosely attempted contractual relationship.