“And as an aside…”

Side letters – why are they used?

A side letter is a document that is ancillary to a contract. Often they are used generally to clarify the terms of a contract.  Where there are multiple parties to a contract, a side letter can agree specific obligations due from one to the other in relation to that contract.  At other times they are used to vary certain terms of a contract or add terms to those already in it, especially where standard contracts have been used and not amended.  They are often found alongside leases, where a landlord has agreed to relax the tenant obligations within the lease in certain circumstances.

Are they binding?

Whether a side letter is binding on the parties depends on whether the letter is itself a ‘contract’. Given that such letters are supplemental to a formal contract or lease and are often not drafted with the same formality, whether they are binding or not is often a grey area.  For a side letter to form a contract and be binding:

1. The parties to the letter must have ‘intended to create legal relations’. This is generally presumed in a commercial transaction. Whilst not the only indication of intention, having both parties sign the letter would lead a court to believe that the parties intended the contents to be binding upon them. Involving solicitors to draft such a letter would also indicate an intention to bind the parties.
2. The letter must be certain as to what is agreed. It cannot simply be an ‘agreement to agree’ a further matter in the future. Where there is detail missing from the letter, the letter may still be binding if the essential terms are agreed.
3. The letter must be either supported by consideration or made as a deed. As most letters will not be in the form of a deed there must be some reciprocity between the parties – i.e. one party is agreeing to certain terms within the letter in return for the other party making payment or agreeing to other terms.

What about on other parties?

Will future parties be bound by a side letter? Side letters are commonly used where a special concession is made to a standard document with the intention being that such a concession is personal and the standard terms will revert to future parties.  For instance where a landlord has agreed to variations to a standard lease document, like a rent deduction or a relaxation on a repair covenant, it might want that concession only to be applicable to the tenant named in the side letter, and not to any party that tenant may sell the lease to.  In such scenarios the side letter should be drafted so that it is expressed to be ‘personal to the tenant’.  Similarly, side letters have been found to bind future landlords despite not being registered at the Land Registry.

Common sense steps

When agreeing side letters to record additional terms or clarify the intention behind contract wording, careful thought should be given to their form to ensure that they are effective and do not commit parties to arrangements further than intended. When purchasing a property or taking the benefit of a contract, a future landlord or buyer should be aware of any side letters that it may be bound to comply with.