Penal contractual terms
Penal contractual terms that seek to impose exorbitant or unconscionable obligations are generally not worth the paper they are written on.
In the case of Vivienne Westwood Ltd. v Conduit Street Development Ltd. (2017), the High Court found one such term unenforceable in the context of a side letter to a retail lease.
A tenant had taken a 15-year lease of shop premises at an initial rent of £110,000 a year, subject to upwards only rent reviews every five years. On the same day as the lease was executed, a side letter was signed whereby the landlord agreed to accept a reduced rent of £90,000 in the first year, rising to £100,000 in year five.
The letter also provided that the rent would be capped at £125,000 a year in the succeeding five years. The letter stated that the agreement was terminable by the landlord with immediate effect if the tenant breached any of its terms or conditions. In the event of termination, a term of the letter provided that rent would be payable in accordance with the lease as if the side agreement had never existed.
Following the first rent review, the landlord sought to increase the rent payable to £232,500 a year on the ground that rent had been paid late, which was a breach of the conditions in the side letter. The tenant launched proceedings in order to hold the landlord to the rent cap agreed in the side letter.
In upholding the tenant’s arguments, the Court found that the term relating to termination of the agreement contained therein was unenforceable as a contractual penalty.
The term sought to impose a greater obligation on the tenant than that which was contained within the lease. Termination of the agreement at any time within the first ten years of the lease would have the effect that the tenant would be obliged to pay additional rent for all the preceding years as well as in the future.
The obligation to pay increased rent on termination was a blunt instrument that could give rise to the tenant suffering substantial and disproportionate financial detriment for a minor breach of covenant that caused no harm to the landlord’s interests.
Notwithstanding the equality of bargaining power between the landlord and the tenant, the term was exorbitant and unconscionable in its potential effects. In the circumstances, the term was of no effect and the rent was capped in line with the other provisions of the side letter.
[edit] Find out more
[edit] Related articles on Designing Buildings Wiki
Featured articles and news
Not buildings. Happy holiday from DB.
Future Homes Standard: Industry calls for more ambition
As the Government FHS consultation finally closes.
Improving government projects with data and AI
Enabling better outcomes, efficient modern delivery and influential leadership on government projects.
BSRIA Living Laboratory Innovation Challenge
Final days for submission, closing March 29.
Windows, their frames, forms, factors and functions.
The hidden subtleties of U-Value calculations
Different contexts and what to include as variables.
A brief run down with related articles.
Electrical sector calls for safer public EV charge points
Serious concerns about electrical safety in the public domain.
Building Blocks manifesto presented to parliament
Architects Declare call in for support of five critical policies.
The four elements of project management with APM
Analysis, expectations, collaborative communication and partnerships.
City of London launches Heritage Building Retrofit Toolkit
Empowering owners to initiate necessary adaptations.
Guidance on RAAC in listed buildings
Published by Purcell, endorsed by IHBC, SPAB and C20.
Learning from the past.
Reluctance to hire people with criminal convictions revealed
Employing People with Criminal Convictions Report.
Tackling unconscious bias; Women's History Month
Personal reflections, as the last week of March approaches.