Xenakis & Anor v Birkett Long LLP

This is a claim for professional negligence brought against a firm of solicitors in respect of their alleged failure to give adequate advice to their clients regarding their potential exposure to personal liability under the suretyship covenants in a Lease. For the reasons that I shall explain, the Claimants have a justifiable grievance about the service that they received from the Defendant. Moreover, they took reasonable steps to respond to the situation in which they found themselves by expending money which was intended to, and in the event did, ameliorate their position. However, because of the way in which they went about their mitigation, the law is unable to offer them anything substantial by way of redress for the Defendant’s negligence. I have reached that conclusion with considerable regret.

At all relevant times, a company named Pink & Lily Ltd., (“P&L”) of which the Claimants were both directors, ran a restaurant called the Barn Brasserie in Colchester (“the Barn”). The First Claimant, Mr Xenakis, and his family were the ultimate beneficial owners of P & L via a tax efficient offshore structure. The Second Claimant, Mr Corke, was the general manager of the Barn. He had no shareholding, directly or indirectly, in P&L. The Barn carried on business from premises leased by P&L from Mr Xenakis’ father-in-law. The Claimants made directors’ loans to P&L as and when required to fund its business operations.

In 2005 the Claimants decided to open another bar and restaurant in Colchester called “The Food Factory”. For these purposes, on 28 October 2005, they formed a limited liability partnership called Blue & Ginger LLP (“B&G”). There were four partners: P&L, Mr Corke, and Mr and Mrs Xenakis. The terms of the Partnership Deed provided that P&L would contribute 70% of the initial capital and Mr Corke the remaining 30%. £70,000 of the first £100,000 of profits would belong to Mr Xenakis and £30,000 to Mr Corke, and any additional profits would be divided between all 4 partners (but Mr Corke’s share remained 30%). The losses would be shared between Mr Xenakis and Mr Corke in the same proportions.

The Claimants identified suitable commercial premises known as The Forum Restaurant in Colchester Business Park. The last two restaurants at that site had failed, but undeterred by this, the Claimants negotiated terms for a commercial lease with the Management Company representing the Landlords, (two special purpose companies within the ING group). Mr Xenakis took the lead in the commercial negotiations, but Mr Corke was kept fully informed and provided input, especially where any matters affecting the operational side of the business were concerned. Heads of terms for a 20 year lease were eventually agreed with the Landlords’ solicitors, Lawrence Graham, in September 2005.

The Landlords required each of the Claimants to personally guarantee B&G’s obligations under the Lease on standard terms which required them to take on the lease for the remainder of the lease term in the event of disclaimer or forfeiture of the Lease during the Guarantee Period. The Landlords had initially wanted a five year Guarantee, but Mr Xenakis and Mr Corke managed to negotiate this down to three years. With their potential exposure under the Guarantee in mind, they also negotiated as low a rental as they could for the first three years, and a rent-free period of six months.

The Claimants had instructed Susan Masters, a conveyancing partner in the Defendant firm, and a long-standing friend of Mr and Mrs Xenakis, to act for them and B&G in connection with the Lease. Sadly, Mrs Masters has since died, and the only account by her of what happened is in an internal report to the Defendant’s senior partner dated 28 November 2008, soon after the potential claim in negligence was intimated. There are also contemporaneous records in the form of correspondence and file notes. Fortunately, there is little or no dispute about the facts.

The premises needed to be cleared before B&G’s contractors could come in and fit out the new restaurant; Mr Xenakis had negotiated a deal with the Management Company under which B&G would purchase some of the stock, fixtures and fittings on site at the reduced price of £5,000 in return for organizing the clearance themselves. Mr Xenakis, in particular, was keen to get into occupation as soon as possible and commence the clearance. By mid-January 2006 the Lease documentation was close to being finalised, and Mr Xenakis was pressing Mrs Masters to conclude the formalities. She was about to go away on holiday, and he was anxious to get the transaction finalised before she left.

On the 18 January 2006 Mrs Masters asked Mr Xenakis to arrange for the rent deposit to be sent by CHAPS to the Defendant’s bank account, as she would need it in cleared funds if the Lease was to be completed the following day. She sent him a letter confirming this by email the following morning, and Mr Xenakis arranged the transfer straight away. By then, Mrs Masters had received from Lawrence Graham for execution an Agreement for Lease, Lease, Rent Deposit and Licence for Alterations. The Management Company was also to be a party to the Lease and Agreement for Lease.

The Agreement for Lease expressly envisaged that Completion would take place at the offices of the Landlords’ solicitors or as they reasonably required in England. However, at 9.49am on 19 January 2006 Mrs Masters received an email from her opposite number at Lawrence Graham, Catherine Pearson, which said that she had spoken to her client that morning and that:

“It takes a few days for my clients to have documents executed as they have to be sent to Guernsey. Accordingly, he has suggested that if you send me your clients’ parts of the documentation duly executed before you go on holiday together with payment of your client’s agreed contribution to the fixtures and fittings and payment of my client’s surveyor’s fees for reviewing the fit out works then the keys can be released in readiness for exchange next week/on your return to the office. Please also confirm in your covering letter that the documentation is released to me unconditionally.”

At 16.29 that afternoon Mrs Masters sent Mr Xenakis by email a copy of a Report on the transaction, and on her searches and enquires, and copies of the documents to be executed. The covering letter asked him to “cast an eye over it before coming into the office”. Mr Xenakis looked through the Report and the accompanying documents; with the passage of time, Mr Corke could not recollect whether he saw the Report, but he did remember going through each and every provision of the Lease. The window of opportunity for studying the documents was short, because they were meeting Mrs Masters the same evening to execute them. Mr Corke had never entered into a lease before, and Mr Xenakis’ sole previous experience of doing so was when he executed the lease in respect of The Barn, which was done round the table in his father-in-law’s house. Neither of them was familiar with the standard terms to be found in such contracts. Importantly, neither of them was aware that the date of the Lease might be later than the date on which the Term of the Lease incepted.

The Report correctly states that the Lease provides for Mr Xenakis and Mr Corke to act as joint and several sureties and explains that this means that each of them is guaranteeing the paying of rent and performance of the lease covenants by B&G and that there is no limit on their liability. It continues:

“The Sureties will be released either [sic] three years from the date of the Lease. However please note that should a liquidator disclaim the Lease or the Landlord forfeit the Lease during that three year period the Landlord may require Michael Xenakis and/or Chris Corke to take a new lease of the Premises in the same terms as the Lease and that lease will continue for the remainder of the twenty year term.”

The word “either” is probably a typing mistake for “after”.

There is a difference of recollection between the Claimants as to how much time they spent in the solicitors’ office that evening, but nothing turns on this. The meeting lasted for at least an hour, which is the time recorded on Mrs Masters’ attendance note. That note, which is brief, records Mrs Masters as advising them that the Guarantee was for three years but unlimited (in amount). There was no discussion at the meeting about when the Guarantee would incept. Mr Xenakis and Mr Corke signed the documents and left them with Mrs Masters. From their point of view, they had completed all the necessary formalities.

The following morning, Mr Xenakis sent an email to Mr Jay Cable, the representative of the Management Company with whom he had been dealing, which he copied to Mr Corke. The email informed Mr Cable that they had transferred the amount of £5,000 representing the purchase price of the stock, equipment and furniture, and asked “is it possible to have the keys for the premises on Monday 23 January, early morning, so that we can start removing the above? Please let me know if this is OK with you…”

Mr Cable responded “this should be fine as long as your solicitor unconditionally releases the executed documents to our solicitor in preparation for completion next week. I have had to send the documents to Guernsey for completion, hence the delay in completion”. This was the first that Mr Xenakis and Mr Corke knew about the documents having to go to Guernsey, and about any potential delay in completion.

On the same day, 20 January, Mrs Masters had emailed Ms Pearson a letter that she said she would send in the DX that evening with the documents. The letter said that she was “enclosing the documents executed in escrow by my clients, which please hold strictly to my order until such time as you are in a position to complete the grant of the Lease to my client:

1.

Agreement for Lease

2.

Counterpart Lease

3.

Counterpart Licence

4.

Counterpart Rent Deposit Deed.

The documentation is released to you when you are in a position to complete all four documents and on the basis that the term commencement date will not be before 23 January 2006 and that the rent commencement date will not be before 23 July 2006.”

Although the documentation was not released “unconditionally” as Ms Pearson and Mr Cable had requested, the keys were released and B&G went into occupation on Monday 23 January 2006. However, the Landlords did not execute the counterparts of the documents within that week, as everyone was expecting. Mrs Masters discovered this on her return from holiday. She wrote to Ms Pearson on 13 February to express her surprise that the Lease had not yet been completed, and to ask whether there was a problem. She does not appear to have received a response.

On 1 March Mr Xenakis contacted Mrs Masters because he was experiencing difficulty with the utility suppliers, who were refusing to make supplies to the premises because of the debts owed by the previous occupiers. They needed written confirmation that the premises had been leased to B&G and Mr Xenakis asked Mrs Masters to provide that confirmation as a matter of urgency. She did so the next day. On 2 March Mrs Masters also rang Ms Pearson and was told that the lease had been executed by the Landlords but not by the Management Company.

Unfortunately the letter from Mrs Masters to the utility suppliers did not have the desired effect. On 15 March Mr Corke, who was still experiencing problems with the electricity supply, rang the Defendant to request a copy of the signed Lease. The file note indicates that he was told that they were still awaiting the return of the Lease from the Landlords’ solicitors, and that there was “nothing more we can do”. Mrs Masters sent a further letter to Ms Pearson on the same day saying that she was at a loss to understand why the Lease had not been completed, and asking for a full explanation and an indication as to when it would be completed. She made it clear that the matter was urgent and explained the problems that her clients were experiencing with the utility suppliers.

Ms Pearson responded on the same day stating that the Lease was still awaiting execution by the Management Company, and enclosing a letter confirming this and confirming the terms of the new Lease for Mrs Masters to pass on to the utility suppliers as a short-term solution. Ms Pearson said that she had chased the Management Company the previous day, and that she would let Mrs Masters know as soon as she was in a position to complete. Unfortunately, despite further chasing letters from the Defendant to Lawrence Graham on 5 April, 5 May and 18 May there was no response from Ms Pearson. Eventually there was yet another telephone discussion between the solicitors on 5 June, in which Ms Pearson promised to speak to her client that same day. According to her attendance note, Mrs Masters observed that they would need to amend the Lease if it was not completed within a week or so. The reason was that due to the Land Registration (Amendment) No 2 Rules 2005, which were about to come into force on 19 June, it would be necessary to add certain “prescribed clauses” to the document.

On 9 June 2006 Mrs Masters rang Mr Xenakis and asked him to press the Managing Agents to execute and return the Lease so that it could be completed before the form of Lease needed to be changed to comply with the new provisions. Mrs Masters also rang Ms Pearson who assured her that the matter was being sorted out and that she was chasing; Mrs Masters’ attendance note says “I will be look[ing] to your clients for any additional costs”.

On 16 June Mrs Masters wrote again to Mr Xenakis to ask if he had received any explanation for the delay, and expressing concern about additional costs being incurred because the Lease would need to be revised. Mr Xenakis’ response was that the only explanation given by Mr Cable to Mr Corke some time previously was that no directors had been appointed to sign the document. He said that ING’s solicitors would have to cover any additional costs. Mrs Masters also wrote to Ms Pearson on 16 June. She indicated for the first time that if she was not told what the problem was, she would need to refer the matter to the Defendant’s litigation department. Sadly even that slightly harder line produced no immediate response. Nor did a chasing letter sent on 24 August. Ms Pearson finally sent the executed counterparts of the documents to Mrs Masters on 12 September 2006.

That was not the end of this unfortunate saga, because once the executed counterparts were back in the Defendant’s hands the prescribed clauses had to be added to comply with the new requirements. By mid-November 2006, the Landlords’ solicitors were finally ready to complete, but by then around £18,000 was payable by B&G in respect of rent, service charges and insurance, to enable completion to go ahead. Mr Xenakis was going away at the end of November, and he asked if completion could be scheduled for the week of his return; in the event it took place on 15 December 2006.

In the course of the inter-solicitor correspondence to which I have referred it appears to have been acknowledged by both solicitors that the Lease could not be backdated, for reasons connected with Stamp Duty. The date of the Lease (and the inception date of the Guarantee) was therefore 15 December 2006. However the Term Commencement Date was specified as 23 January 2006, that being the date on which B&G went into occupation of the premises. Rent was payable as from 23 July 2006, on the expiry of the rent-free period.

Mr Xenakis and Mr Corke were of course aware on 19 January 2006 that after they executed the documents they had to be executed by the Landlords. They had also been told, in the Report that was sent to Mr Xenakis on 19 January, that their Guarantee ran from the date of the Lease. However, at no point during the above chronology did Mrs Masters ever explain 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) because time would only start to run from the date of completion and not from the Term Commencement Date of 23 January 2006.

In short, the delay on the Landlords’ side meant that the period of the Guarantee would not be commensurate with the first three years of the Term of the Lease, which is what Mr Xenakis and Mr Corke both believed it would be, since that was the bargain they thought they had made with the Landlords when the latter agreed to accept a three year Guarantee. Since the Agreement for Lease also contained personal guarantees of B&G’s obligations under that Agreement, in practical terms Mr Xenakis and Mr Corke were sureties for B&G’s rental payments and certain of its other obligations for longer than three years, albeit under two separate contracts. Perhaps more significantly, the period during which they were exposed to the risk of being required to enter into leases for the remainder of the lease term if B&G defaulted and the Lease was forfeited or disclaimed would not end on 23 January 2009, as they expected, but on 15 December 2009. They did not know that, and Mrs Masters did not tell them. It was not something that a reasonably competent solicitor in Mrs Masters’ position ought to have expected either of these two individuals to work out for themselves.

The Claimants only discovered this in late November 2008. By that time the business was not going well, and they were considering closing down the restaurant and winding up B&G. On 17 November 2008 they sought advice from Mrs Masters as to their liabilities if they took that course. They told her that B&G was solvent, that it was up to date with its payments of rent and other debts, and that its major creditor was P&L. Mrs Masters advised them, in a letter sent by email to Mr Xenakis, that if they closed the business (in breach of the “keep-open” covenant in the Lease) and wound up B&G the Landlords would probably require them to take a new lease for the unexpired remainder of the Term. She said that she thought that in the current market, they had no choice but to keep B&G going, because it would take payment of a very substantial premium to persuade the Landlords to agree to the surrender of the Lease. She also advised, correctly, that they would not improve the situation by assigning the Lease.

The advice given on 17 November 2008 appeared to be premised on the assumption that the Guarantee extended for the entire duration of the Lease. Mr Xenakis rang Mrs Masters on 20 November and pointed out that the Guarantee was for three years. Having checked the terms of the Lease, Mrs Masters rang him back. She then dropped the bombshell that the Claimants were exposed to liability under the Guarantee for a further 326 days – almost another year. Since the lease required the premises to be used as a restaurant, and Mr Xenakis and Mr Corke already knew that they were unable to trade there profitably, the financial implications for each of them personally if B&G defaulted or breached a covenant were very serious indeed. They were looking at a potential exposure of millions of pounds if their Guarantee was called on, and the risk of that occurring would last much longer than they had anticipated. Mrs Masters advised that it was essential that B&G should not breach the terms of its lease before 15 December 2009, including the covenant that it should trade from the premises. She told them that it had to be “business as usual”. She confirmed that advice in writing in a letter to Mr Xenakis dated 1 December 2006.

Faced with that situation, Mr Xenakis and Mr Corke felt that they had no choice but to keep B&G alive and trading from the premises until after the Guarantee had expired. The only reason for doing this was to minimise (and hopefully eliminate) the exposure of Mr Xenakis and Mr Corke to claims under the Guarantee. There was a further relevant consideration, which was that B&G was borrowing money from National Westminster Bank on terms that included personal guarantees from each of the Claimants and a charge over Mr and Mrs Xenakis’ home. Therefore it was imperative to do nothing that might alert the Bank to the fact that the business was in trouble and cause it to foreclose on the loan.

Since the usual source of funds for B&G was P&L, the decision was made to continue with that arrangement. However, at this time P&L was also making a trading loss. It was unable to finance its own business and keep B&G afloat without a substantial injection of capital. Both Mr Xenakis and Mr Corke therefore arranged for payments to be made into P&L from their own funds and P&L then “drip fed” payments into B&G or else settled invoices from B&G’s trade creditors directly. On the advice of the Claimants’ accountants, these monies were treated as directors’ loans, in the same way as earlier injections of capital into P&L had been. In addition, Mr Xenakis asked his mother-in-law to lend £100,000 to P&L, which she did on 25 June 2009. P&L gave a debenture over its assets as security for repayment of that loan with interest. Mr Xenakis is meeting the repayments on that loan; there was a dispute as to whether he is legally, as opposed to morally, obliged to do so, but Mr Xenakis told the Court that he had personally guaranteed the repayments and I believe him, even though the arrangement was not recorded in writing. An oral Guarantee is a valid contract, and this is not a scenario in which one could ever imagine s.4 of the Statute of Frauds 1677 coming into play.

The action taken by Mr Xenakis and Mr Corke was an appropriate and reasonable response to the situation in which they found themselves in November 2008. It accorded with the legal advice that they had received at that time, and it had the desired effect, in due course, of eliminating their exposure under the Guarantee. The steps they took to keep B&G trading were steps in reasonable mitigation of their loss. On behalf of the Defendant, Mr Rosenthal did not seek to argue the contrary.

The pleaded claim for damages is for £221,110.29 but that figure represents the trading losses incurred by B&G in continuing to trade through 2009. In the course of the trial it became clear that the Claimants were really seeking to recover the sums that they injected into P&L from November 2008 onwards, for the purpose of financing B&G’s trading for the remainder of the Guarantee period. £20,000 was contributed by Mr Corke, whose financial resources were more limited than those of Mr Xenakis. However, Mr Corke accepted in cross-examination that P&L had repaid him £5,000. Mr Xenakis had already injected £100,000 into P&L on 6 October 2008 to keep B&G trading, but that was before he and Mr Corke became aware that their Guarantee would not expire until 15 December 2009. Thereafter he made substantial payments into P&L’s account between 24 December 2008 and 23 August 2009, totalling £124,150. Mr Xenakis estimated that since then he had been repaid around £10,000.

Mrs Masters owed duties of care to B&G as proposed lessees and to each of Mr Xenakis and Mr Corke as proposed sureties of B&G’s liabilities to the Landlords. Although Mr Xenakis was more experienced in matters of business than Mr Corke, that experience was not of a nature which affected the scope of the retainer or of the duty to advise, or the manner in which it might be discharged by a reasonably competent solicitor. Mr Xenakis’s prior business experience would not have alerted him to the risk that the date of the Lease, and thus the date on which the period of the Guarantee started to run, might be different from, let alone much later than, the date on which the Term commenced. I accept his evidence that he thought the Lease would bear the date on which B&G went into occupation of the premises. That was a perfectly reasonable assumption for any layman, including someone with the background and experience of Mr Xenakis, to have made in the circumstances.

On behalf of the Claimants, Mr O’Doherty put the case in negligence three different ways. His primary case was that the advice given by Mrs Masters in the Report and in conference on 19 January 2006 was inadequate and fell short of the standard of care required of a reasonably competent solicitor. She failed to give sufficiently comprehensive advice on the risks involved for the Claimants as sureties in allowing or procuring B&G to enter the premises before either the Lease or the Agreement for Lease were completed. The duty of care was not discharged by telling them, without more, that the Guarantee ran for three years from the date of the Lease. This was a classic case of a risk which might elude even an intelligent layman unless it was pointed out by the solicitor, and thus there was a duty to advise the clients of the risks: see County Personnel (Employment Agency) v Pulver [1987]1 WLR 916 at 922D.

Alternatively, even if the advice given on 19 January was adequate, Mr O’Doherty submitted that Mrs Masters failed to take the steps that a reasonably competent solicitor would have taken in response to the delay. She should have put more pressure on the Landlord to complete, and threatened litigation much sooner than she did. In the further alternative, he submitted that Mrs Masters should have raised the impact on the Guarantee Period that the delay was causing for the sureties firstly with them, and then with Lawrence Graham, and sought to negotiate changes to the contract that brought the date of commencement of the Guarantee into line with her clients’ original expectations. Had she taken that course, Mr O’Doherty submitted that there was a real chance that the Landlords would have agreed to make the changes or, at the very least, completed the transaction far sooner than 15 December 2006.

In determining whether there has been a breach of duty in a professional negligence case, the test is what the reasonably competent practitioner would do, having regard to the standards normally adopted in his profession. Reasonableness is not a warranty of perfection. It does not follow from the fact that something has gone badly wrong with a transaction that the solicitor engaged by the party who stands to suffer from it has been negligent. A solicitor may make a mistake, but that is not necessarily negligent, because a reasonably competent solicitor may have acted in the same way and made the same mistake.

It is essential to avoid the taint of hindsight, especially in a case such as the present, and that is something of which I have been particularly mindful. The behaviour of the solicitor concerned must be evaluated by considering the information she had, and the circumstances in which she found herself at the relevant time. The key issue for the Court to determine is whether the solicitor’s behaviour was within the range of behaviour open to a reasonable solicitor in those circumstances. The fact that another solicitor may have responded differently or given better, more helpful or clearer advice does not make this particular solicitor negligent unless what she did or said is obviously outside that range.

As regards the Claimants’ primary case, the first question I have to determine is whether the risk to them as Guarantors caused by B&G going into occupation of the premises prior to completion was an obvious risk that a reasonable solicitor in the position of Mrs Masters would have foreseen at the time. The answer to that is undoubtedly yes, as Mr Rosenthal very properly conceded. Indeed Mrs Masters was conscious of that risk, and at one point had it in mind to take steps to protect her clients against it. This much is evident from the very first page of the Report of 19 January 2006 in which Mrs Masters said:

“The Agreement for Lease is the document we agreed to when it was anticipated there would be a long lead in time between Blue & Ginger committing to the Lease and the Lease itself being completed. We would suggest that the Agreement for Lease still be entered into, and the appended copy should be read carefully and the following noted…

Michael Xenakis and Chris Corke are to be parties to the Agreement for Lease to ensure that Blue & Ginger perform their obligations under the Agreement.”

If it had been completed before Blue & Ginger went into occupation and if the “Completion Date” had been specified (which in the event it was not), the Agreement for Lease would have afforded the Claimants some protection against delay by the Landlord in completion of the Lease itself. It contained, in Clause 9, a contractual mechanism for enforcing completion, by which the party who was ready willing and able to complete could serve a notice on the other party, which would oblige him to complete within 10 working days after service. That in turn would form a strong foundation for a claim for specific performance. However, the Agreement for Lease was not a valid and binding contract unless and until it was executed by the Landlord, and thus in the circumstances of this case it afforded the Claimants no protection. Mrs Masters was an experienced conveyancer, and she would have known this.

Mr Rosenthal submitted that executing that Agreement for Lease did the Claimants no harm, though it gave them no benefit. That being so, one wonders what Mrs Masters had in mind when she suggested that it should still be entered into. She did not explain her thinking to the Claimants. What matters, though, is the fact that Mrs Masters was alive to the risk that a delay in completion could pose to her clients, because at a time when she thought that there might be a “long lead-in time” she took steps to protect against it. It would appear that the only reason why those steps were abandoned was her assumption that the risk was now unlikely to materialise and that it was therefore a risk worth taking; but that was not a decision for Mrs Masters, but a decision for her clients to make, once the risk and its potential impact on their position as sureties had been pointed out to them. Unfortunately that never happened.

The next question is what, at a bare minimum, a reasonable solicitor alive to that risk, and knowing that it was now going to be unprotected, would have done in the circumstances facing Mrs Masters and with her knowledge on 19 January 2006? Was it within the parameters of reasonable behaviour to have advised that the Guarantee ran from the date of the Lease, but to have said nothing to explain that this meant the date of completion by the Landlords, and nothing about the impact on the term of the Guarantee of a mismatch between that date and the commencement of the Term under the Lease?

Mrs Masters was dealing with institutional Landlords who were insisting on release of the documents before they handed over the keys. Their solicitor, from a reputable London firm, had told her only that morning (before she released the Report to the clients) that there would be a slight delay whilst the documents went to Guernsey for signature, and completion would take place the following week. There had been no suggestion that the Management Company was not in a position to sign straight away. She had no reason to disbelieve what she had been told, or to suppose that there would be any significant delay. Her clients were pressing her to finalise the deal. They had made it clear that they wanted access to the premises as soon as possible. Mrs Masters plainly thought there was nothing to worry about. That was understandable.

However, Mrs Masters should have been alive to the prospect that Mr Xenakis and Mr Corke would have assumed that their Guarantee would cover the first three years of B&G’s obligations under the Lease unless she told them otherwise, and that simply stating that the Guarantee ran for three years from the date of the Lease would not necessarily dispel that assumption. She also knew that in the event that there was a delay in completion, for whatever reason, the downside for her clients as sureties was significant. Mrs Masters knew that these were risk-averse clients. She knew they had tried, unsuccessfully, to persuade the Landlords to agree that their Guarantees should not be joint and several for 100% but split between them: 70% to Mr Xenakis and 30% to Mr Corke. She knew that they had successfully negotiated a time limit on the Guarantee of three years, which delay in completion would undermine. She knew that they had arranged to conduct the business through a limited liability partnership and that Mr Xenakis ran the existing restaurant business at the Barn through a limited company, P&L. They had sought specific advice from the Defendant on their liabilities as partners in B&G if things went wrong and the partnership had to be wound up. In short, these were clients who cared about their exposure to loss. If there was a risk they would want to be told about it, and make up their minds as to how to respond to it.

Mrs Masters also knew that once those documents executed by her clients were released, she would be handing control over when completion took place to the Landlords. Specific performance would not be available; the only way to try and force the Landlords to complete would be tricky, time-consuming and expensive litigation based on a constructive trust/proprietary estoppel argument which would be far from certain to succeed. If the documents were eventually signed in the form in which her clients were going to execute them, it might be hard to rectify them so as to make the Guarantee commensurate with the first three years of the Term of the Lease.

In her internal report to the Senior Partner of the Defendant Mrs Masters stated:

“I do not believe that any commercial conveyancer would have acted differently from the way I did. It was not within either my own or the Landlords’ solicitors contemplation that completion would be delayed until December 2006, the delay being exacerbated by the introduction of Prescribed Clauses and I had no reason therefore to link the period of the surety covenants to the term commencement date while negotiating the term of the lease. This is especially so, as term commencement dates sometimes pre-date the date of a lease for various reasons.”

That misses the point. Of course nobody would have anticipated in January that completion would not take place until it was almost Christmas; but instead of completion taking place on Friday 20 January or Monday 23 January with B&G going into occupation on 23 January, as expected, it was obvious on the morning of 19 January that there was now going to be some delay in completion over which Mrs Masters and her clients had no control. That carried with it a risk to the sureties if B&G went into occupation on Monday morning. There was no existing Agreement for Lease. Mrs Masters had not been instructed that there was a specific commercial reason why the term commencement date should pre-date the Lease. Even if she had believed that arrangement might have inured to the benefit of B&G, she owed duties to Mr Xenakis and Mr Corke 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.

In my judgment, taking all these factors into consideration, in failing to give any advice that would have alerted the clients to the risk they were running by releasing the documents and procuring B&G to go into occupation before the Landlords completed, Mrs Masters was plainly negligent. What Mrs Masters said in the Report and at the conference on 19 January 2006 was insufficient to meet the minimum standard required of a reasonable solicitor in her position. It was wrong to assume that the clients would have appreciated that the “date of the Lease” meant the date on which the Landlords signed it. At the very least Mrs Masters should have told Mr Xenakis and Mr Corke in terms that their Guarantee would not incept until the date on which the Landlords completed the transaction, which was something over which she (and they) would have no control once the documents were released to Lawrence Graham; and that consequently there was a risk that if B&G went into occupation before the Landlords completed, their Guarantee would start later than the commencement date of the Term of the Lease.

A far more difficult question is whether that advice would have caused the Claimants to act any differently. Mr Xenakis and Mr Corke both gave evidence about this. They did their honest best to assist the Court by giving frank answers to questions, even though their recollection of events in 2006 had understandably dimmed with the passage of time. An illustration of this is Mr Xenakis’ evidence when asked what he would have done if Mrs Masters had told him that the three years under the Guarantee would only start to run when the Landlord signed the Lease. He said this:

“I can take risks but the risk has to be measured. If I thought they would sign next week or the week after I would have signed of course…. If [Mrs Masters] said “you will get the documents next week or the week after” I would have signed. If she had said “I have no control, and I don’t know when they will sign” I would not have signed because it was open-ended. I need to know the end.”

In response to similar questions, Mr Corke said:

“I wouldn’t have been concerned if she had told me there was going to be a gap between our going in and the Landlord signing. But if she told me that the Guarantee wouldn’t start until they signed, I would have asked her what we could do to force them to sign because then the Landlord could keep us on the hook indefinitely.”

Although hindsight can subconsciously colour the evidence of even the most honest of witnesses, I accept that evidence. I consider that if Mrs Masters had given the appropriate advice, the Claimants would not have taken the risk of delay in completion by the Landlords, even though everyone believed on the 19 January 2006 that completion would take place within a week or so. The reason for this is that the advice would have provoked these clients to ask further questions, and a discussion about what to do. Mrs Masters would have explained that the only way to be sure that the period of the Guarantee covered only the first three years of B&G’s obligations under the Lease was to wait until completion before occupying the premises. She would no doubt have also said that she believed the Landlords would sign the documents within a week, since that was what their solicitor had indicated.

Whilst Mr Xenakis might still have been prepared to go ahead as planned, on the basis that Mrs Masters had every reason to be confident that she would get the documents back within a week, Mr Corke would have focused on their inability to force the Landlord to sign. He would have wanted to wait and be sure that the Landlord did sign before B&G went into occupation, because, short of renegotiation, that was the only way to be certain that the period of the Guarantee matched the first three years of the Term. Since there was no particular downside for them in waiting for another week or fortnight before going in to clear the premises, having waited for several months already, that is what they are more likely to have decided to do after talking the matter through. Mr Xenakis may well have been the partner with the largest share and the man who took the lead in dealings with the Management Company and with the solicitors, but the impression I formed of their business relationship was that he would not have wanted to do something with which Mr Corke was uncomfortable. Moreover, Mr Corke was quite capable of standing his ground. Mr Xenakis said in evidence that he would not have worried if the Lease was completed in mid-February.

Once the delay had exceeded a couple of weeks the Claimants would then have had further discussions with Mrs Masters about how best to protect their position. That would probably have happened on her return from holiday in February. They may have been willing to wait a little longer for completion, but I have no doubt that sooner or later the further discussions would have resulted in an approach to Lawrence Graham, to ensure that the documents brought the inception date of the Guarantee into line with the Term Commencement Date. Since B&G would not yet have been in occupation this could have been done without renegotiation by simply 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 and found another site for their restaurant despite all the time and energy they had expended on this particular project. Since they would not have caused B&G to go into occupation before completion, they would not have committed themselves to expending the kind of sums that would make this option commercially unattractive. Mr Xenakis was concerned to know his exit date, and that meant he needed to know the date on which his liability as surety commenced; the problem from his perspective (and from Mr Corke’s) was that they did not know when that would be, and had no means of knowing. Mr Xenakis’ evidence was that as the delay dragged on, he may have reached the stage where he thought the transaction was not going to happen, and he would have gone on to the next project. He said “I would have walked away if I didn’t know how long the Guarantee was going to be” by which, in context of his other evidence, he plainly meant if he did not know precisely when it would expire. I accept that evidence.

In the light of my conclusions on the primary case I can deal more swiftly with the alternative ways in which the claim is put (on the assumption that, contrary to my findings above, Mrs Masters was not negligent in failing to give any advice about the risk on 19 January). Once the delay had occurred Mrs Masters did her best to chase Lawrence Graham; I am not persuaded that her efforts in this particular regard fell below the standard to be expected of a reasonable solicitor, nor am I persuaded that threatening to put the matter into the hands of the litigation department at an earlier juncture would have prompted speedier completion. Even after Mrs Masters indicated that she might have to resort to taking that step, and even after she had asked Mr Xenakis to try and put pressure on the Management Company to complete, there was a delay of around another three months.

However, that does not mean that a reasonable solicitor in Mrs Masters’ shoes would or should have accepted the situation as a lost cause, and done nothing else to try and correct it. A reasonable solicitor, faced with this unexpected and unexplained delay in completion after B&G had gone into occupation, would have done more than chase Lawrence Graham. First and foremost she would have had to explain the problem that the unexpected delay had created to her own clients, who would be looking to her for a solution. I have no doubt that on receiving that explanation the Claimants would have instructed her to seek to renegotiate the terms to bring forward the Guarantee Period. She should then have suggested to Ms Pearson that something should be done to cure the problem, by revising the terms of the Lease, failing which her clients could simply walk away.

There was nothing to be lost by making that approach, and everything to gain, particularly if Mrs Masters did so before the delay had dragged on past the opening of the restaurant in May 2006, when the threat to walk away would be less of a bargaining counter. I would expect the reasonable solicitor in Mrs Masters’ position to be taking her clients’ instructions and then actively seeking a solution with Lawrence Graham almost as soon as she had returned from holiday to find that the transaction had still not completed, and certainly no later than the date when she was told that the Landlords had signed the documents but the Management Company had not.

Suppose that after she was told on 2 March that the continued delay in completion was solely attributable to the Management Company, Mrs Masters had said to Ms Pearson that when the Claimants had agreed to stand surety for three years, they naturally expected the three years in question to be commensurate with the first three years of B&G’s tenancy. The unexpected delay in completion coupled with the linking of the Guarantee period to the date of the Lease had brought about a situation that no-one had anticipated or intended at the time of the negotiations. Since the Lease could not be backdated, the terms should be revised to make it plain that the Guarantee should incept on the Term Commencement Date rather than the date of the Lease. Otherwise, since there was no binding Lease, and the restaurant had not yet opened and there was no indication of when completion might take place, and no excuse for the delay, her clients might have to reconsider whether they wanted these premises after all. Ms Pearson would have had to have gone back to take instructions from her client.

In my judgment, there was a real chance that such an approach by Mrs Masters would have borne fruit either in the form of an agreement to revise the terms in the manner requested or, at the very least, a rapid completion of the Lease. Mr Rosenthal submitted that it was pure speculation that a hard-nosed commercial organisation like the ING Group which believed it held all the cards, would have capitulated to a demand for revised terms. It would have known that on entering into occupation, B&G would have made a substantial financial commitment, making it difficult for them to walk away from the deal even though legally there was nothing to stop them. It would have been given advice that there was nothing upon which to base a claim for specific performance, and that legal action to compel completion on other grounds or to seek rectification would be difficult, time consuming and expensive.

Whilst that is true, I cannot accept Mr Rosenthal’s submission. It overlooks the fact that by 2 March the Landlords had already signed the Lease, and therefore they presumably wanted this deal to go ahead. They were not the ones who were holding things up, and they had no reason to cause further delay; it was their Management Company which was now causing the problem. It was the Management Company, and Mr Cable in particular, who had negotiated the deal with Mr Xenakis and Mr Corke in the first place. The reasons for the further delay of around six months after the Landlords had signed and before Ms Pearson obtained the executed counterparts in September 2006 remain a mystery. The only likely explanations are indolence, oversight or deliberate and cynical delay with the intention of clawing back at least some of the period conceded on the Guarantee by the back door. In the light of the many chasing letters to Lawrence Graham, oversight is the least likely of these.

It is not clear who was giving Ms Pearson her instructions, given that the Landlords were special purpose corporations based offshore, but if Mrs Masters had sought to renegotiate in the manner described above, Ms Pearson would have to have advised her clients that it was at least arguable that the terms the Landlords had already signed up to did not reflect the true contractual bargain made with the sureties, and there was a possibility that if rectification was sought it would be granted.

In any event, if asked to make that small amendment to the terms of the Lease, ING Group may well have thought that Mrs Masters had a fair point, and that what she was suggesting was a reasonable way of reflecting the true commercial bargain. It would have been commercially astute enough to appreciate that the delay would not look good, and that a Court might have been suspicious about its motives for dragging its heels. Trying to gain an advantage from its own delay in completion would have had an air of sharp practice about it, and I am not prepared to assume that an institutional Landlord, however hard-nosed, would not care about that. I cannot dismiss the chance of amendment to the terms of the Lease as speculative; on the contrary, I consider there is a real prospect that the relevant person within the ING Group acting on behalf of the Landlords would have agreed to it.

Even if the Landlords were not prepared to revisit the terms, they would have appreciated that the quickest way to put paid to the dissatisfaction being expressed would be to complete the existing transaction. The shorter the delay, the less likely the sureties were to continue to make a fuss about it. Therefore the most likely result of an attempt to renegotiate is that the Management Company would have signed the Lease and returned it to Lawrence Graham promptly.

In those circumstances Mrs Masters’ negligence after 23 January 2006 caused the loss of a substantial chance of rectifying the problem altogether by revising the terms of the Lease, and even if that did not occur, the loss of a substantial chance of truncating the extra period for which the Claimants were exposed to risk under the Guarantee. I estimate that there would have been at least a 50% chance of successfully renegotiating the terms of the Lease to accelerate the start of the Guarantee Period, and a much higher chance of 80% of getting the Lease completed before the legislative changes of 19 June came into effect.

However, because of my conclusions on the primary way in which the Claimants have put their case, and also because of my conclusions on the damages issues, to which I now turn, there is no need to carry out an assessment of the damages for the loss of those chances.

I have already found that the actions taken by the Claimants in response to the situation in which they found themselves at the end of 2008 were reasonable and that they mitigated their exposure to what would otherwise have been a very substantial loss, since B&G would not have been able to trade for another year without their financial support. Although they have undoubtedly expended money, the real issue is whether they have suffered a loss in consequence of taking those steps in mitigation. The Defendant’s primary submission is that they have not; any loss was sustained by P&L, not by the Claimants personally. Whilst the Claimants may have suffered a loss had they injected funds into B&G directly, or even if they gave the money to P&L, they took the decision not to do that. Instead, they made loans to P&L which were, and are, repayable on demand, and have been partially repaid.

The primary way in which Mr O’Doherty put the claim for damages was that the Claimants used P&L as their agent for the purpose of injecting cash into B&G to keep it trading. He submitted that it was irrelevant that the cash injections had been treated as directors’ loans in the company’s accounts, because the Claimants were under an independent legal liability to reimburse or to indemnify P&L for any sums P&L had paid to or on behalf of B&G. P&L had no business rationale for bearing B&G’s trading losses, and there was no evidence that it had agreed to bear those losses for its own account.

I agree that despite having the largest partnership share, P&L would appear to have had nothing to gain from keeping B&G trading at a loss beyond January 2009 (when the Claimants’ Guarantees should have expired). Moreover it had insufficient resources to do so. The Claimants plainly injected the necessary funds into P&L, or procured that others did so, in order to enable it to keep B&G carrying on business as usual. However, those who take advantage of the use of limited liability structures must bear the downside of ordering their affairs in that way, as well as reaping the benefits of the protection from personal liability and the various fiscal advantages it can afford them.

There is no evidence of an agreement between P&L, B&G and Mr Corke and Mr Xenakis, by which Mr Corke and Mr Xenakis promised that if P&L funded B&G’s trading activities for a further year, they would reimburse it. On the contrary, the evidence is that they lent the money on an interest free basis to P&L to enable P&L to drip feed it into B&G. Each loan was made on terms that it would be repayable to the lender on demand, and indeed some of that money was repaid. Once the money earmarked for B&G was transferred into P&L’s account it became P&L’s money and was intermingled with other money that was used for P&L’s own business, presumably including trading receipts from operating the Barn. P&L then made the payments to, or on behalf of, B&G as and when needed.

That arrangement is fatal to the agency argument. The Claimants were not giving money to P&L as agent to pass on to B&G on their behalf. They were maintaining the pre-existing arrangements for financing the two businesses which made P&L the largest creditor of B&G. Mr O’Doherty submitted that P&L was never intended to bear the loss. Its accounts show the opposite. So do the board minutes of P&L recording discussions by the directors of P&L on 9 December 2008 and 7 March 2009. These record Mr Corke as explaining that the losses were continuing at The Forum due to falling demand and that further funding was required. Mr Xenakis requested further details and estimates for the funding:

“Michael expressed concern and asked again for ways to reduce expenditure further without effecting (sic) the performance of the lease

Chris stated that a substantial amount of cash will be required to fund The Forum operation”.

Moreover, P&L has benefited, each year, from recording the payments made to it by Mr Corke and Mr Xenakis as directors’ loans. As Mr Rosenthal pointed out, the sums shown on note 14 to the financial statements for 2009 and 2010 under the heading “related party transactions” reflect the debts due to Mr Xenakis and Mr Corke under their directors’ loans as amounts falling due within a year, and the debts due from B&G to P&L as “the accumulated share of the company’s (sic) trading losses”. The obligation to repay the loans was therefore taken into account in working out the profits or losses of P&L and would have affected its liability to pay tax. If there was a claim to an indemnity that reduced or eliminated the debt due from P&L in respect of the loans, the accounts and financial statements would be misleading.

The loan agreements evidenced by the accounts make it impossible to find that there was an implied agreement by the Claimants to indemnify P&L for its outlay in keeping B&G trading for another year. It is possible, in some circumstances, for a company to claim a right to reimbursement from a director who procures it to make payments out of capital which are of no benefit to the company but which benefit the director personally. That right to an indemnity (or damages in a like sum) arises by operation of law and not by express or implied agreement. However I would be loathe to make a finding that Mr Corke and Mr Xenakis were in breach of their duties as directors of P&L in procuring P&L to expend its capital in a manner that was not in its best interests and which only served to confer a personal advantage upon them.

In any event, even if P&L would have been entitled to look to Mr Xenakis and Mr Corke for an indemnity against its outlay in respect of B&G’s debts, which could have been offset against its contractual obligation to repay the directors’ loans on demand, the problem remains that P&L has never asserted such a claim against them. Indeed, as and when it has been asked to repay part of the loans, P&L has done so without demur. On the evidence before me, I cannot make the finding that the directors of P&L acted in breach of their duties in procuring P&L to repay part of those personal loans in circumstances in which P&L could have legitimately resisted such payment on the basis of an obligation to indemnify.

Thus the position remains that Mr Corke and Mr Xenakis can look to P&L to repay them the balance of the money they loaned it, and can demand that money at any time. The only financial loss they have personally incurred in consequence of the steps they took in mitigation is therefore the loss of use of the money which they loaned to P&L 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 P&L until either the date of repayment or the date of judgment, and in addition in Mr Xenakis’ case, the interest on the money that he used to repay his mother-in-law under his personal guarantee at the rate of £1,000 per month.

It follows from my decision on this issue that I need not go on to consider the other points of detail made on quantum. There will be judgment for the Claimants for damages in the amount of interest referred to above. I will ask Counsel for their assistance in carrying out the computations and hopefully agreeing a figure.

This is one of those rare cases in which the proper application of legal principles produces a result which is morally unjust. It simply remains for me to reiterate my regret that I was constrained to arrive at this unpalatable conclusion, and that I was unable to award the Claimants what they actually expended, purely and simply because they decided to lend the funds to P&L.