Issues arising upon the uptake of occupation prior to the formal completion of a Lease

July 11, 2014

The Judiciary have issued a warning to the legal profession with the decision in Xenakis and Corke v Birkett Long LLP [2014] EWHC 171 (QB).

In this case the tenant company had agreed a twenty-year commercial lease with the landlord with two directors of the tenant company acting as guarantors for the first three years of the lease. The Lease was drafted so that any leasehold liabilities, and the guarantee entered into by the directors, would only begin upon the formal completion of the lease rather than from the date the tenant company took up occupation of the premises (23rd January 2006).

Due to delays by the landlord’s management company, completion of the Lease only took place in December 2006 (when the Landlord executed the Lease) some eleven months after the tenant company took up occupation. However, at no point did their solicitors adequately advise the guarantors of their potential exposure to personal liability should there be a delay in completion of the Lease. Therein arose the problem, the guarantors believing that their obligations would expire three  years from the start of occupation (i.e. in January 2009), when in actual fact their personal obligations would not expire until 14th December 2009. As a result, the directors were obliged to keep the failing business afloat, incurring huge personal expense in order to avoid being personally liable to enter into a Lease for the remaining seventeen years of the Lease term. In the circumstances the directors brought a professional negligence claim against the firm of solicitors for breach of their duty of care tothem as guarantors.

The High Court held that the guarantor’s solicitors were plainly negligent as a result of:

1) Their failure to recognise that going into occupation prior to completion was an obvious risk of which they should have been warned ;
2) Their failure to realise that the guarantors could potentially be operating under a misapprehension that their guarantee would only cover the first three years of the tenant
company’s obligations under the lease; and
3) Their inactivity during the unexplained period of delay when the terms of the leasehold agreement could have been renegotiated to bring forward the guarantee period.

The directors, due to their actions, managed to mitigate substantial losses and did not personally suffer significant losses themselves in the process; the only personal loss incurred being loss of use of the money loaned to the company interest-free. Consequentially, the directors were only able to recover damages amounting to the value of the interest accruing on the sum loaned.

This case is an illustrative example of a situation where delayed completion of a Lease places a duty on solicitors to review the original timescales for the commencement and end of leasehold obligations and entitlements. Additionally, any potential risks arising as a consequence of occupation prior to completion should be warned of in advance so that any unnecessary exposure to increased levels of risk is avoided.

It is a vivid illustration of yet one more pitfall for guarantors to guard against or be guarded against by their advisers.

Kathryn Collie, Director

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