Side Letter

A side letter is a separate written document, signed alongside or after a commercial lease, that varies, clarifies, or supplements the lease terms without amending the lease itself. Side letters commonly record personal concessions such as rent reductions or relaxed clauses, and they are often personal to the original parties, lapsing when either the landlord or tenant changes.

What Is a Side Letter in a Commercial Lease?

A side letter is a short ancillary document that records an agreement connected to a lease without changing the lease's recorded text. Landlords use side letters to grant concessions they do not want written into the lease or filed publicly, most often a rent reduction or a relaxed clause. According to UK firm Herrington Carmichael, "the term side letter has no official legal standing," so its effect depends entirely on drafting.

Side letters typically stay off the primary lease document for a reason. A concession granted personally to one tenant, such as a temporary rent abatement, is one the landlord does not want a future buyer, lender, or assignee to treat as a permanent lease term. Keeping it in a separate letter lets the landlord frame it as personal and temporary rather than a fixture of the lease.

For lease abstraction, the side letter is a trap. It is a governing document that a reader can miss because it sits outside the lease and its amendments. A side letter can quietly cut base rent, waive a fee, or suspend an obligation, and an abstract built only from the lease will overstate income or misstate the tenant's duties.

Why a Side Letter Matters

A side letter matters because it can override the economics stated in the lease while living in a separate file that is easy to overlook. A buyer underwriting a rent roll from the lease alone can miss a side letter that abates rent, and the missed concession inflates net operating income. In abstraction, every side letter must be located, read, and reconciled against the lease.

The personal nature of many side letters is the second reason they matter. Because concessions are often stated to be personal to the original tenant or landlord, a change in ownership or an assignment can extinguish them. A tenant relying on a rent reduction may lose it when the building sells, and a buyer assuming a concession survives may be wrong. The quotable point for an operator: a side letter is only as durable as the words that define whose benefit it is, because a personal concession can vanish the moment the parties change.

Example

A tenant leases 8,000 square feet at a base rent of $28.00 per square foot, or $224,000 per year. A side letter signed at completion grants a personal rent reduction of $4.00 per square foot for the first three years, provided the tenant is not in default. The table shows the gap between the lease rent and the side-letter rent.

An abstract built from the lease alone records $224,000 per year. The side letter reduces the effective rent to $192,000 for three years, a $32,000 annual difference and $96,000 over the concession period. A buyer who underwrites the higher lease figure overstates income by that amount, and if the side letter is personal, the buyer may also be wrong to assume the concession continues at all.

Variations and Edge Cases

A side letter is not one instrument: its subject, its durability, and whether it binds successors all change how it must be abstracted. The table covers variants an operator should confirm before relying on the lease alone.

The common mistake is abstracting the lease and its amendments while never asking whether a side letter exists. Because a side letter can cut rent or waive obligations yet sit outside the lease chain, a complete abstract has to account for every ancillary document, not only the ones bound into the lease.

Side Letter vs Lease Amendment

A side letter is often confused with a lease amendment, but they change the lease in different ways. A side letter is a separate document that sits beside the lease and records a personal or temporary agreement, often without altering the lease's own text. A lease amendment is a document that formally changes the lease itself, and its terms typically bind successors as part of the lease.

The distinction is permanence and reach. A side letter is best used for something temporary or personal, and a personal side letter can fall away when the parties change. A lease amendment is the correct instrument when the change is meant to be permanent or material, because it becomes part of the lease and runs with it. Using a side letter for a permanent change, or an amendment for a personal favor, creates the risk that the concession outlives or dies before it was meant to.

Frequently Asked Questions

Is a side letter legally binding?A side letter can be legally binding if it is properly drafted and executed, but the term itself has no official legal standing. Its effect depends on the words used, including whether it is personal to the parties and whether it binds successors. Poor drafting is the main reason side-letter concessions are lost or disputed.

Does a side letter survive when a property is sold?A side letter survives a sale only if it is drafted to bind successors. Many side letters are personal to the original landlord or tenant, which means the concession can lapse when the property is sold or the lease is assigned. A buyer should never assume a personal concession continues without reading the letter.

Why do landlords use a side letter instead of changing the lease?Landlords use a side letter to grant a concession, such as a rent reduction, without recording it in the lease itself or in a publicly filed document. Keeping the concession separate lets the landlord frame it as personal and temporary, so a future buyer, lender, or assignee does not treat it as a permanent lease term.

Related Terms

• Lease Abstract

• Lease Amendment

• Commercial Lease Agreement

• Base Rent

• Lease Critical Dates