The Handshake Behind the Contract: When a Side Letter Becomes Binding

Commercial property transactions are full of assurances that never make it into the formal document. A landlord says a rent review will be dealt with generously. A tenant is told that consent to alterations will be forthcoming. An email confirms that a break option will not be enforced strictly. A side letter records that a service charge cap applies. None of this looks like a contract. Some of it is.

The recurring error is to treat informality as a lack of legal effect. English law does not require a document to be labelled a contract, printed on letterhead or signed by a board of directors. It asks whether there was an offer, acceptance, consideration, an intention to create legal relations and sufficient certainty. If those elements are present, a side letter can bind. An email can bind. An oral promise can bind. The absence of a solicitor is not a defence.

The label matters less than the substance

A side letter is simply a document that sits alongside a principal agreement. It may be a variation, a collateral contract, a waiver, a representation or a non-binding statement of intent. The legal category depends on what it says and how the parties behaved, not on the heading at the top.

Email is particularly dangerous because it is conversational. A short message confirming that a landlord will accept a reduced rent for six months may contain all the ingredients of a binding agreement. Electronic signatures are generally capable of satisfying signature requirements. The fact that the message was sent by a junior surveyor or an assistant does not automatically prevent liability if that person had actual or apparent authority.

Where formality is compulsory

Some property transactions cannot be created by informality. A contract for the sale or other disposition of an interest in land must be in writing and signed by or on behalf of each party under section 2 of the Law of Property (Miscellaneous Provisions) Act 1989. A lease for more than three years must be granted by deed. A side letter cannot bypass those requirements simply because the parties intended it to have effect.

That does not make every informal property assurance irrelevant. A side letter may operate as a personal concession, a waiver of a strict right or an estoppel. But if it purports to grant a new legal interest, an option, a break right or a tenancy, the formalities must be checked before completion. The practical lesson is that a side letter should be drafted as if it will be litigated, because one day it may be.

Entire agreement clauses are a shield, not a force field

Most commercial leases and sale contracts contain an entire agreement clause and a no-variation clause. The first seeks to prevent reliance on pre-contract statements. The second requires variations to be in writing and signed. Both are useful. Neither is absolute.

An entire agreement clause can exclude reliance on a representation, but it cannot exclude liability for fraudulent misrepresentation. A no-variation clause can be enforced, but it can also be waived by conduct or overcome by estoppel. If a landlord accepts a lower rent for two years while knowing the tenant is relying on an informal concession, the clause may not deliver the clean answer the landlord expected.

Authority, certainty and the danger of optimism

An assurance from someone without authority may not bind the company. But apparent authority can arise from job title, previous dealings or the silence of senior management. Businesses should ask who is entitled to commit the company and should make that clear in correspondence. A statement that a matter is subject to board approval or subject to contract is not a mere formality. It can determine the outcome.

Certainty is equally important. An email saying that the parties will sort out the service charge later may be too vague to enforce. A promise that the landlord will be reasonable is unlikely to create a measurable obligation. The more precise the assurance, the greater the risk that it is binding.

Estoppel and the limits of good faith

English commercial law does not impose a general duty of good faith. That surprises many overseas clients. But promissory estoppel can prevent a party from enforcing strict legal rights where a clear promise was made, the other party relied on it and it would be inequitable to go back on it. Estoppel is usually a shield, not a sword. It can defend a tenant against forfeiture or a rent demand; it rarely creates a free-standing claim for damages.

Estoppel by convention can also arise where both parties have conducted themselves on a shared assumption. The result is that an informal understanding may shape the parties' rights even where the formal document says something different.

The property risks that hide in the file

In commercial property, side letters commonly concern rent-free periods, service charge caps, break options, landlord's consent to assignment, works obligations and reinstatement. A buyer or lender who fails to ask for them may inherit a liability that is not visible in the lease. A tenant who relies on an oral assurance without documenting it may find that the assurance disappears when the relationship sours.

Due diligence should include a direct request for all side letters, emails and written assurances relating to the property. The title should be checked for registrable interests. If a concession is intended to bind successors, it should be documented properly and, where necessary, registered.

A practical discipline

Before signing, decide whether an informal assurance is meant to be binding. If it is, put it in a deed, a written variation or a clearly drafted side letter, check authority and consider registration. If it is not, say so expressly: subject to contract, non-binding, for discussion only. Avoid ambiguous emails that read like commitments. Keep the full correspondence, not just the final message.

The informal promise is not a harmless extra. It is either a term, a representation or a risk. Treat it accordingly. Howard Fairbairn's view is that the most expensive side letter is the one nobody remembers signing.