Negligence – Solicitor – Guarantee – Claimants guaranteeing obligations of limited liability partnership under lease of commercial premises – Guarantee intended to be for first three years of lease – Claimants’ exposure under guarantee proving to be longer than three years in circumstances where partnership going into occupation several months before lease completed and guarantee running from completion date – Whether defendant solicitor negligent in failing to advise of that risk – Whether damages recoverable – Claim allowed in part
The two claimants ran a restaurant in Colchester through a company of which they were directors. In 2005, they decided to open another bar and restaurant in the town through a limited liability partnership of which they and the company were partners. They found suitable commercial premises and negotiated heads of terms with the landlords for a 20-year lease, instructing the defendant firm of solicitors to act for them in relation to the lease. The landlords required each of the claimants to give a personal guarantee of the partnership’s lease obligations but the claimants were able to negotiate the guarantee period down to three years.
Completion of the lease was originally intended to take place in late January 2006 and the partnership was allowed into occupation at that time. However, various delays on the landlord’s part meant that the lease was not completed until December 2006. As a result, the date of the lease was December 2006 and the claimants’ guarantees ran from that date, but the lease term was specified as commencing earlier in January 2006, when the partnership had gone into occupation, and rent was payable from July 2006 after the expiry of an initial rent-free period.
In November 2008, the claimants became aware for the first time that there was a disparity between the guarantee period and the first three years of the lease term. The business was not going well and they were considering closing down the restaurant and winding up the partnership, but, owing to their continuing liability under the guarantee, that course would expose them to the risk of the landlords requiring them to take a new lease for the unexpired remainder of the term, pursuant to their guarantee obligations. Instead, they continued to run the business at a loss through 2009, until after the guarantee period ended, funding it by directors’ loans to the company which in turn used those funds to finance the partnership.
Thereafter, the claimants brought a claim against the defendant, alleging negligent advice in relation to the guarantee and lease term. They claimed damages of £221,110.29, representing the trading losses incurred by the partnership in continuing to trade through 2009.
Held: The claim was allowed in part.
(1) The defendant owed duties of care to the partnership as proposed lessee and to each of the claimants as proposed sureties of the partnership’s liabilities to the landlords. The risk to the claimants as guarantors caused by the partnership going into occupation of the premises prior to completion was an obvious risk that a reasonable solicitor in the position of the defendant would have foreseen at the time. Although the claimants were aware in January 2006 that the documents had to be executed by the landlords and had been told that their guarantee ran from the date of the lease, at no point had the defendant explained that the lease would bear the date on which the landlords executed the documents or that any delay by the landlords in completing the transaction would affect the three-year guarantee period, and thus their exposure to risk under the surety covenants in the lease. The claimants had not known of that risk and the defendant had not told them. It was not something that a reasonably competent solicitor in the defendant’s position should have expected either of the claimants to work out for themselves. The defendant knew that any delay in completion would have significant implications for its clients as sureties.
It also knew that they were risk-averse clients who cared about their exposure to loss and would want to be told of any risk, in order to make up their minds as to how to respond to it. Although nobody would have anticipated in January 2006 that completion would not take place until December, it was obvious by then that there would be some delay in completion over which the defendant and its clients had no control and carrying with it a risk with it if the partnership went into occupation. The defendant had not been instructed that there was a specific commercial reason why the term commencement date should pre-date the lease. Even if that arrangement might have inured to the benefit of the partnership, it owed duties to the claimants personally as proposed sureties and it was plainly not in their interest that there should be any significant gap between the term commencement date and the subsequent date of the lease. Taking all those factors into consideration, the defendant had been negligent in failing to give any advice that would have alerted the claimants to the risk that they were running by releasing the documents and procuring the partnership to go into occupation before the landlords completed. The advice that it had given was insufficient to meet the minimum standard required of a reasonable solicitor in its position.
On the evidence, if the defendant had given the appropriate advice, the claimants would not have taken the risk of delay in completion by the landlords but would have asked further questions and discussed what to do. The defendant would then have explained that the only way to be sure that the period of the guarantee covered only the first three years of the partnership’s obligations under the lease was to wait until completion before occupying the premises. Once the delay in completion extended beyond a couple of weeks, the claimants would have sought to renegotiate to ensure that the documents brought the inception date of the guarantee into line with the term commencement date, by agreeing on a term commencement date that post-dated completion. If the matter could not be amicably resolved or if the delay continued, the claimants would have walked away from the deal. They would not have committed themselves to expending the kind of sums that would make the premises commercially unattractive.
(2) Although the defendant had been negligent, the claimants were not entitled to substantial damages owing to the way in which they had funded the partnership through their company. They had not given money to the company as agent to pass on to the partnership on their behalf. Instead, they had lent the money on an interest-free basis to their company, to enable the company to drip feed it into the partnership. Each loan was made on terms that it would be repayable to the lender on demand and indeed some of it had been repaid. The claimants were entitled to look to the company to repay the balance of the money at any time. The only financial loss that they had personally incurred in consequence of the steps that they took in mitigation was therefore the loss of use of the money they had lent to the company on an interest-free basis; namely, a sum equivalent to the interest on those sums from the date on which the money was transferred to the company until either the date of repayment or the date of judgment. There would be judgment for the claimants in the amount of that interest.
Paul O’Doherty (instructed by Wortley Byers LLP, of Brentwood) appeared for the claimants; Adam Rosenthal (instructed by Henmans Freeth LLP, of Oxford) appeared for the defendant.
Sally Dobson, barrister