Side Letters - Some Issues to Consider

Published: 9th December 2009

Side letters have become commonplace in transactions to vary provisions in the main document. Particular care should be given when entering into a side letter to ensure the validity of both the side arrangement and the main agreement, as a problem in the drafting of a side letter may have an impact on the validity of the main agreement.

For side letters to be binding they must comply with the law of contract. This means that consideration must be given between the parties in order that the contract may be binding, unless it is made under seal in the form of a Deed. Side letters are not usually made in the form of a Deed, which account for the reason why they are expressed to be made "in consideration of", and may include "in consideration of the Lease being entered into".

At the outset consider whether the arrangement will benefit successors in title or simply the parties to the letter and also whether there is a time limit imposed on the side arrangement.

The side letter may constitute a separate collateral agreement in its own right. This may mean that if the main document is assessed to be invalid, for example, by reasons of not complying with statute, the side letter may still be valid.

However a side letter may also be seen to be concealing the terms of an Agreement. In the case of Allied Dunbar Assurance Plc -v- Homebase Limited [2002] EWCA Civ 666 it was decided that where a separate Deed was used to get round a main provision in the Lease regarding the rent in a sub-lease, this was to be read together with the sublease. The Courts stated that a Landlord is entitled to be told the true basis of a proposed transaction for which consent is sought and, in this case, the side arrangement was simply concealing the truth.

A practical disadvantage of side letters is that they may be lost or overlooked as they are not incorporated in the main document. It is always important to place a copy of the side letter with the main document to avoid any problems in the future and this is especially important if the other party is not legally represented. Whilst raising enquiries at the start of a transaction it is good practice for a purchaser to check whether there are any side letters outside a Lease to safeguard inheriting any circumstances that he may not be aware of.

It is therefore important to consider the affect of a side arrangement and also how it works in conjunction with the main document. If entering into a side arrangement a copy of the completed document must always be kept in a safe place to avoid any problems at a later stage.

If you would like to discuss any of the issues raised in this article please contact Karl Jackson in our Real Estate department on 0161 214 0500.