A lease starts on the date on which it is granted, and not before, but the term commencement date can be almost any date the parties choose. The date is used in conjunction with the length of the term to calculate exactly when the lease ends, but may also be used to help calculate rent commencement dates, rent review dates, break dates and other key milestones during the term of a lease. Xenakis v Birkett Long LLP [2014] EWHC 171 (QB); [2014] PLSCS 47 highlights the need for special care if there is a mismatch between the term commencement date and the date of a lease.
The litigation arose because the guarantors of a lease found themselves on the hook for longer than they had expected. They had opened a restaurant on a business park in the name of a limited liability partnership and gave personal guarantees for the tenant’s liabilities. The landlord had wanted a five-year guarantee, but the guarantors negotiated the period down to three years and, with their potential exposure in mind, also negotiated a six month rent-free period.
The landlord allowed the tenant into occupation pending completion of the lease, but dragged its heels for the best part of a year before signing and dating the lease. The term commencement date and the beginning of the rent-free period corresponded with the date on which the tenant was allowed into occupation. The guarantors were under the impression that their guarantees would run from that date too and did not realise that their liability had been extended because the guarantees were expressed to run from the date of the lease and that the lease could not be dated until it was completed.
The restaurant did not do well and the guarantors sought advice with the intention of winding up the business after the first three years of trading. Their solicitors advised them that their guarantees were still in force because of the delay in completing the lease. They also warned them that the landlord would probably require them to take a new lease for the unexpired residue of the term if they were to close the restaurant in breach of a “keep-open” covenant in the lease. This forced the guarantors to keep the business open for a further year, until the guarantees expired, to avoid personal liability for millions of pounds.
The judge ruled that the guarantors had made a perfectly reasonable assumption. They were not legally qualified and their solicitors should have explained the position to them. It did not suffice to report that the guarantees ran from the date of the lease. The guarantors should have been told about the risks that they were running by going into occupation before the lease was completed, without having any control over the completion date, and should have been advised of the potential implications of the mismatch between the term commencement date and the eventual date of the lease.
The lawyers had also let their clients down by failing to advise them to renegotiate the commencement date of the guarantee when completion was delayed; this might have borne fruit or resulted in the earlier completion of the lease. The guarantors had a legitimate grievance, but were not entitled to substantial damages for other legal reasons.
Allyson Colby is a property law consultant
