Edwin Coe Property Blog – Unexpected consequences of delayed completion

The recent decision in the case of Xenakis and Corke v Birkett Long LLP demonstrates the importance of bearing in mind the time frames for matters in a lease such as guarantees, warranties and rent-free periods where these time frames are based on the date of completion of the lease but there is a subsequent delay before actual completion.

In Xenakis and Corke in September 2005 the landlord and tenant agreed to a new lease for a term of 20 years to the tenant company. Under this lease Mr Xenakis and Mr Corke, the directors of the tenant company, agreed to act as personal guarantors for a period of three years and there was a standard provision that if the tenant company became insolvent in this period the directors would be liable to enter into a new lease of the premises for the remainder of the term.

On 19 January 2006 the tenant company and the guarantors signed the lease in anticipation of completion the next day. However, completion never occurred, and the landlord failed to execute the lease until 15 December 2006. In the interim, the period the parties had agreed that the tenant would be allowed into occupation of the property and accordingly the term of the lease began on 23 January 2006.

Unfortunately for the guarantors, the wording of the lease meant that the three year guarantee period only started to run from the date of the lease, rather than from the commencement of the term of the lease. This meant that the liability of the guarantors would continue until 14 December 2009 rather than 22 January 2009.

By November 2008, the tenant’s business was failing and the directors were considering closing the business down as they were under the impression that their guarantees would expire shortly in January 2009. It was only now that they were advised that if they closed the business before 14 December 2009, they would be required to personally take a new lease for the 17 years remaining. Accordingly, the directors had to keep the business going for another year and were forced to inject funds of £240,000 from a family company.

The court held that once there was a delay in completing the lease, the three year guarantee period should have been allowed to start on the term commencement date, when the tenant company went into occupation, rather than the date of completion. However, based on the specific method of funding used by the directors, the court held that they had suffered no loss.

Summary

Whilst often a delay in formal completion will not result in any adverse consequences, this case illustrates that in any case of delayed completion the provisions in the lease and original timelines agreed should be thoroughly checked. This is to ensure there are no adverse effects of the delay and if necessary to renegotiate any timescales. Once the lease has been formally executed, the terms will be set and it is therefore crucial to review the situation prior to formal completion, rather than spending time and money afterwards in dealing with any unexpected consequences of the delayed completion.

For information regarding Edwin Coe and the Property and Construction group please visit http://www.edwincoe.com/services/property.asp.

If you aren’t receiving our legal updates directly to your mailbox, please sign up now