Makdessi v Cavendish Square Holdings BV followed when landlord tried to enforce the termination of a side letter in a tenancy agreement.

Vivienne Westwood Limited v Conduit Street Developments Limited [2017] EWHC 350

Facts

A side letter was agreed between Vivienne Westwood Limited and their landlord, which provided that the first ten years of a fifteen-year lease would be charged at a lower rate. Above this, it was agreed that it would be capped at £125,000, however, this side letter agreement would come to an end in certain circumstances, namely if there was a breach in the terms of the lease.

Within this ten-year term, a market increase that was noted on the standard review date meant that the rent would rise, subsequently meaning that the rent was paid late by the claimant. This was naturally in breach of the terms of the lease, and meant that the landlord claimed it was his right to terminate the side letter, leading to a claim by Vivienne Westwood Limited.

In their action, Vivienne Westwood Limited argued that termination of the side letter operated as a penalty and then should be void. They claimed that there were primary obligations and secondary within a lease, and that the agreement in the side letter operated as a primary obligation, which was to pay the rent at the rate set out, and overriding the terms in the lease itself making those terms secondary obligations. This meant that by terminating the primary obligation, it triggered the secondary obligation thus acting as a penalty, of which can only be applied to secondary obligations within the terms of a contract. The landlord argued that it had a legitimate interest in the tenant paying the full rent. This was because substantial financial significances would flow from a breach however minor or insignificant.

Held

An obligation to pay the open market rent, contrary to the terms of a side letter, is ‘exorbitant or extortionate’ per Judge Fancourt. He then followed Makdessi v Cavendish Square Holdings BV [2015] UKSC 67, handed down that ‘The landlord’s right to terminate the side letter arose on the occurrence of any non-trivial breach by the tenant of its obligations. It was also clear from the wording of the side letter that its termination had retrospective effect, meaning that upon termination, the tenant would have to pay additional rent for all the preceding years of the term that had passed, as well as paying it for the future. The obligation to pay rent at a higher rate as from the rent commencement date of the lease, regardless of the nature and consequences of the breach, was penal in nature.’ This meant that the termination of the side letter was unenforceable applying.

Conclusion

Both a landlord and tenant can take valid insight from this case, but ultimately a tenant will note the benefits from this case more so than a landlord. A landlord will now have to be more stringent within their terms to ensure that they limit their liability about rules on penalties under a standard lease. A tenant must also ensure that any reduction offered by a landlord cannot be withdrawn capriciously. Finally, it can be seen that it is more difficult for landlords to manage their properties where there are side letters, plus ostensibly a tenant may use this result to keep whatever benefits agreed, even if they have done wrong.

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