The tenant leased retail premises from the landlord. The premises were leased for a term of 15 years from November 2009 at an initial rent of £110,000 per annum, subject to rent reviews of the open market rent in the fifth and tenth years.
A side letter was entered into at the same time as the lease and under its terms, the landlord agreed to accept a lower rate of rent increasing gradually from £90,000 for the first year to £100,000 in the 5th year. Rent would then be capped at £125,000 per annum for the following five years if a higher open market rent was determined in the first rent review.
The lower rent, set out in the side letter, could be terminated by the landlord if the tenant breached any of the terms of either the side letter or the lease and, if terminated, rent would then be payable as set out in the lease and as if the side letter had never existed so that the tenant would be forced to pay the additional rent for all the preceding years as well as paying it going forward.
The tenant failed to pay the rent in June 2015 and the landlord claimed that the side letter had been terminated and that the open market rent was payable and proposed a rent of £300,000 p.a.; subsequently RICS appointed an expert and the rent review progressed and was determined by the amount of £232,500 p.a.
The Court considered whether or not the right for the landlord to terminate the side letter upon any breach of contract by the tenant and with retrospective effect, was a penalty and therefore unenforceable.
The Court concluded that it was unenforceable; the obligation to pay rent at a higher rate from the rent commencement date of the lease, regardless of the nature and consequences of the breach, was penal in nature and that the extra financial detriment to the tenant seemed “exorbitant and unconscionable” and was out of all proportion to the landlord’s legitimate interest in having the tenant comply with its obligations.
This case demonstrates the risk involved in agreeing side rent concessions as well as the potential consequences of not paying rent on the date it falls due.
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