In Vivienne Westwood Limited v Conduit Street Development Limited [2017] EWHC 350 (Ch), the termination of a side letter that allowed a tenant to pay a reduced rent was held to be a penalty and was not enforceable.
Flagship store
Vivienne Westwood had taken a 15 years lease of a flagship ground floor and basement shop off Regent Street at a rent of £110,000 per annum with upwards only rent reviews. The landlord had separately agreed in a side letter to allow Vivienne Westwood to pay a reduced rent of £90,000 per annum in the first year, increasing to £100,000 in the fifth year and thereafter at £125,000, on the basis that the rent review provisions would not apply.
The side letter was a personal arrangement and was stated to end with immediate effect if any terms of the lease or side letter were breached. It was also said to end if Vivienne Westwood assigned the lease or ceased to trade from the premises. The agreement expressly stated the side letter would not be a variation of the lease.
Breach of lease
Vivienne Westwood failed to pay a quarter’s rent. The landlord gave notice ending the side letter arrangement and instructed a surveyor to assess the market rent for the outstanding rent review. Vivienne Westwood immediately paid the quarter’s rent, which the landlord accepted, but only on the basis of part payment of the outstanding review. The rent was then reviewed to £232,500 per annum.
When the matter went before the High Court, it agreed with Vivienne Westwood that the termination provisions of the side letter were unenforceable as they were a contractual penalty. It concluded that the rent would remain at £125,000 per annum for so long as the tenant satisfied the terms of the side letter.
Penalties
The High Court applied principles set out in recent case law which changed the law on penalties (Cavendish Square Holding v El Makdessi and ParkingEye v Beavis). It was held to be reasonable for Vivienne Westwood to expect consequences where it breached the covenants in its lease.
However, where a breach results in fresh obligations on the tenant the law will consider the proportionality of those obligations. If these result in a benefit to the landlord which exceeds the remedies normally envisaged for such a breach the court cannot enforce these obligations.
Here, the rent reduction arrangement could be terminated for just a minor breach. The breach resulted in a new obligation to pay a higher rent than had been originally agreed. The minor breach could resulted in a major windfall of an increased rent for the landlord. The High Court held that this would be out of proportion to the landlord’s interest in ensuring that the tenant did not commit the breach and, therefore, such an arrangement was a penalty.
Whilst this case is surprising, it is a reminder for all landlord and tenants to think carefully about the terms of side letters, how they could be interpreted as changing primary obligations and what the effects of those changes may have in the future.