It is becoming more prevalent, in connection with commercial/retail shop leases, for financiers of both Landlords and Tenants to seek the other party to enter into a direct “side deed”. For example, the Tenant’s financier will (in addition to taking a mortgage over the Lease), seek direct contractual relations with the Landlord in order to secure a variety of different rights in the event of default by the Tenant with the financier.
Unsurprisingly, stalemates are becoming commonplace in this regard.
Why would a Landlord create direct relations with the financier of its Tenant and increase its potential liability and risk?
This article briefly explores the main reasons the Side Deeds are being sought and ways to prevent the aforementioned stalemates transpiring.
What are Side Deeds?
Side Deeds create a direct contractual relationship between the financier and a third party. That third party is usually a counterparty to an essential contract or arrangement with the borrowing party. Side Deeds relating to leases are commonly known as rights of entry (where the borrower is the Tenant) or side deeds (where the borrower is the Landlord).
Why are Side Deeds required?
Side Deeds for leases are usually sought where premises are unique or of limited supply, or where the termination of the contract would be materially adverse to the ongoing enterprise of the borrower.
For example, the leased premises for a retail business may rely on its unique location as a large part of the value of its enterprise. If the lease is terminated and the business forced to move, the new location may not have the foot traffic or unique view of the existing premises. A Side Deed can assist to prevent the unexpected termination of such a lease.
What are the key terms of a Side Deed?
The content of a Side Deed can vary depending on the type of contract involved, but there are a few key elements which a side deed should cover when in connection with a commercial/retail lease:
- Default: a direct obligation for the counterparty to notify the financier of a default, prior to termination;
- Remedy Breach / Step-In: an express right to remedy defaults to ensure the lease remains on foot. These rights may include the option for the financier to ‘step in’ and perform the obligations of the borrowing party to preserve the lease; and
- Enforcement powers: an acknowledgment from the counterparty that an enforcement of the financier’s security (by the appointment of a receiver or manager) does not constitute a default under the lease, and that the counterparty will continue to perform obligations.
How to prevent the stalemate?
Although this may create a different stalemate (depending on the bargaining position of the parties), this matter should be addressed during the negotiation of the terms of the Lease. Whether you are a Tenant or a Landlord, you should seek the inclusion of clauses that expressly prohibit the requirement to enter into Side Deeds with the other party’s financier and/or expressly requires the entry into (or reasonable cooperation) of the other party doing so.
At the very least, flagging this issue at the outset might encourage the other party to ascertain the potential for such future requirements of its financier and have these tabled prior to entry into the Lease. The parties will be much more inclined to negotiate reasonably, on entry into the Side Deed, before their positions are set in stone in an executed Lease.