Commercial Property

Case Name, Reference and Bailii Link

Summary

Ian Quayle considers an unusual professional negligence case involving a joint venture where a very basic error led to a significant claim. 

It is important to verify who the client is and what the status of the client is when dealing with joint ventures. This case reveals how a simple mistake can have drastic consequences for all concerned. 

Facts

The case concerned a plot of land of 1.88 acres near Oswestry in Shropshire, which its owners intended to develop. The owners discussed with the claimant, a property developer, a joint venture
to develop the land. In March 2015, outline planning permission for 12 homes was obtained, subject to a satisfactory Section 106 agreement between the council and the owners. 

In autumn 2015, the claimant and the owners agreed to form an LLP to develop the land. The owners would retain the land, the LLP would obtain finance for the development and would commission the claimant to manage it. The claimant and the owners were established clients of the defendant, whom they instructed to act for them.  

Various agreements prepared by the defendant were executed in early March 2016. They included an LLP agreement and a development agreement, which provided the core terms of the joint venture. The LLP was incorporated on 25 March 2016.  

The claimant’s joint venture developer sued its former solicitors in negligence arising from a failure to ensure that the LLP joint venture vehicle was incorporated before joint venture documentation was signed, enabling the landowner to sell the land elsewhere and causing the joint venture developer loss of profits. 

First Instance

At trial, the court considered the enforceability post-incorporation of rights and obligations between an intended LLP and third parties created pre-incorporation under section 5(2) of the Partnership Act 2000.  

By failing to ensure the LLP was incorporated before the other agreements were executed or at least advising the claimant of the risk of not doing so, the defendant was in breach of its duty to exercise reasonable care in advising and acting for the claimant.  

The judge concluded that the order of completing the development agreements, and the LLP incorporation did create a risk that the owners could back out. ‘A reasonably competent solicitor would have sought to ensure that the LLP was incorporated first and were it to appear that this was not going to happen, would have advised of the consequent risk of unenforceability,’ added the judge. ‘In failing to take steps to ensure that the LLP agreement was incorporated before the other agreements, or at the very least advising the claimant of the risk of executing those documents before incorporating the LLP, the conduct of the defendant fell below the standard of the reasonably competent solicitor and was a breach of its duty of care to the claimant.’ 

As a result, the claimant succeeded in obtaining judgment for a loss of chance assessed at 32% of the profit that it would have made if the development had gone ahead.