Xenakis – Birkett Long – Negligent Property Solicitor – Restaurant – Lease – Personal Guarantee – Failure to Advise of Risks.
In the recently reported solicitor’s negligence case of Xenakis and Corke v Birkett Long LLP [2014] EWHC 171 (QB) the claimants appeared to have a good claim: the solicitor had been negligent and the court accepted that the claimants had – quite reasonably – incurred substantial costs as a result, which they would not have incurred had the solicitor not been negligent. However, they did not recover their outlay, and the case usefully illustrates that what might appear to many to be a straightforward and strong professional negligence claim can in fact be quite the opposite.
The claim concerned a property transaction entered into shortly before the start of the recent recession. The claimants were directors of a company (P&L) which operated a restaurant in Colchester. They lent money to P&L when necessary. They decided to open a second restaurant using a limited liability partnership (B&G). The claimants and P&L were partners in B&G.
At the end of 2005, suitable premises were found. It was agreed that a 20 year lease would be granted to B&G. The claimants gave personal guarantees that if, within 3 years of the date of the lease, the lease was disclaimed (because of B&G’s insolvency) or forfeited (because of a serious breach of the lease by B&G) they would take on the lease for the 17 or so remaining years. Birkett Long (BL) were the claimants’ solicitors.
In January 2006, the claimants signed the lease and started refurbishing the premises. The lease was not executed by the last party until December 2006, by which time restaurant had been open for some months.
Towards the end of 2008 (nearly 3 years after the claimants had signed the lease) the claimants took legal advice from BL about closing the B&G restaurant because it was struggling, no doubt as a result of the recession. BL told them that that the personal guarantees would expire in December 2009, 3 years after the transaction was completed, and not in January 2009 as the claimants had expected, and advised against closing the business before the guarantee period expired.
Not wanting personal liability for the lease for another 17 years, the claimants decided to keep the B&G business running until the guarantees expired.
The usual source of funds for B&G was P&L. P&L was also struggling, so the claimants made payments into P&L from their own funds. On the advice of the claimants’ accountants, the monies were treated as directors’ loans. P&L then “drip fed” payments into B&G or else settled invoices from B&G’s trade creditors directly. In the claim against the solicitors BL, the claimants sought to recover the sums that they injected into P&L from November 2008 onwards which were in the region of £240,000.
Although the court found the solicitor negligent for not advising the claimants of the risks of starting the business before the lease was completed and for not trying to persuade the landlord to agree that the guarantee period should start earlier, it did not allow the claimants to recover P&L’s outlay in keeping B&G trading for another year. The claimants could look to P&L to repay them the balance of the money they loaned it, and could demand that money at any time. The only financial loss they personally incurred was the loss of use of the money which they loaned to P&L on an interest-free basis.
Whilst the claimants may have suffered a loss had they injected funds into B&G directly, or even if they had given the money to P&L, they had decided (for other commercial reasons) not to do that. Instead, they made loans to P&L which were repayable on demand, and had been partially repaid.
Whilst the judge did express sympathy for the claimants, the proper application of legal principles meant that he was bound to decide against them, even though the result may be morally unjust.
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