Solicitors negligent for advice on Lease Guarantees but not liable for losses suffered due to Claimants’ financing arrangements.
Litigants do not always get their just desserts.
Negligent solicitors fortuitously escape substantial liability due to Claimants’ corporate arrangements.
In 2005, the Claimants, Mr Xenakis and Mr Corke, decided to open a restaurant in Colchester Business Park and they formed a company called Blue & Ginger (“B&G”) for this purpose. They already had a restaurant in Colchester called the Barn Brasserie which they operated through Mr Xenakis’s family’s company called Pink & Lily.
The Defendants acted for the Claimants on the new Lease for a term of 20 years under which the Claimants were to be Guarantors for the first 3 years. In the event that B&G became insolvent in this period, the Claimants would be liable to take a new Lease for the remainder of the term. The landlord had wanted a 5 year guarantee but the Claimants not only limited it to 3 years but also limited the rent payable during this period.
The Lease was drafted so that the Guarantors would be released once 3 years had passed from the date of the Lease, rather than the commencement of the term of the Lease. The term was to commence on 23 January 2006 and B&G took occupation then but it took the landlord considerable time to actually execute the Lease and it was not completed until 15 December 2006. Accordingly, the Claimants’ liability as Guarantors would continue to 14 December 2009 rather than 22 January 2009.
As bad luck would have it, the business was unsuccessful and it was only in November 2008, when they were thinking of closing B&G down, that the Claimants were advised that, if they did so before 14 December 2009, they would be required as Guarantors to take a new Lease and, accordingly, they had to keep the business going until the end of the year.
So the Claimants had to arrange funding of some £240,000 to keep the business afloat a further 11 months and mitigate their losses. They took financial advice and injected the necessary funds by way of making Directors Loans to Pink & Lily who, as they had done in the past, then financed the business by drip-feeding payments into B&G from time to time. A small part of the Loans were repaid to the Claimants by Pink & Lily.
The Court held that the Defendants had been negligent in allowing this situation to occur. They should have advised the Claimants of the risks of starting the business before the Lease was completed and, once there was a delay in completing the Lease, should have required the 3 year period to commence on the term commencement date. The Court accepted the Claimants’ evidence they would not have proceeded if they had been correctly advised.
But, as all the Claimants had actually done was make loans to Pink & Lily, the Court held they had not suffered any actual loss as these stood to be repaid. It was Pink & Lily that would be out of pocket and the Claimants only loss was limited to the loss of use of their money as the loans were interest free. What the Claimants should have done was to agree to reimburse Pink & Lily as they would then have suffered a loss.
Whilst the Court had great sympathy for the Claimants, and considered the result morally unjust, it pointed out that parties who take advantage of limited liability structures for tax reasons must bear the consequences of running their affairs in this way.