First Retainer
Duty of Care
Second Retainer
In the recent Victorian Supreme Court case of McGee O'Callaghan Gill Pty Ltd v Deacons Graham & James the Court of Appeal unanimously held that the solicitors acting for a prospective purchaser and subsequent buyer were not required under their terms of retainer, nor did they have a duty of care, to advise clients as to steps to be taken in exercising landlord's options to renew a lease when they were engaged for the purpose of providing advice for the purchase of a building.
A company purchased a building subject to leases. The purchaser engaged a firm of solicitors to assist in the negotiations and to comment on the leases. After completing the purchase the purchaser engaged a real-estate agent to manage the building and review the leases.
One of the leases contained an option to renew on expiry of the initial term, which was exercisable by the landlord. The option was not exercised during the prescribed period. A notice was dispatched later but the tenant denied that the notice was effective and brought proceedings for a declaration that the landlord had not exercised the option. The owner joined the agent as third party and claimed damages for breach of retainer and negligence. Both claims were settled out of court.
The agent joined the landlord's solicitors alleging breach of the terms of their retainer to advise in the purchase of the building or alternatively breach of their duty of care in failing to advise the owner of matters necessary to exercise the option, a matter alleged as necessary to ensure the commercial efficacy of the lease.
Justice Buchanan examined the advice that the solicitors were obliged to give the owner with respect to the option. He held that the solicitors were engaged not to advise the owner on the steps to be taken in the course of managing the leases, but only to advise about the purchase, thus obliging them to draw to the owner's attention to aspects and unusual features of the leases that bore on the value of the building. While agreeing with Buchanan, Justice Callaway expressed the view that there are circumstances where solicitors also have an obligation to mention unusual features that do not bear on the value of the property proposed to be purchased, but that obligation did not arise in the present case.
Buchanan accepted that the option enabling the landlord to renew the terms of the lease was 'unusual' and capable of being relevant to the value of the building. However, the solicitors' obligation to advise was limited to the landlord's ability under the lease to compel the tenant to pay higher than market rent at the end of the initial term of the lease - an aspect relevant to the decision to buy the building. This obligation did not extend to the 'mechanical steps' necessary to be taken by the landlord to exercise the option.
Buchanan concluded that the solicitors should not have known or foreseen that the landlord was relying on them to alert it to the need to take any particular steps in the future management of the leases on the basis that the landlord was an apparently sophisticated investor and that there was a managing agent.
The agent argued that the advice given by the solicitors as to liability for carpet replacement between the landlord and the tenant ought to have included advice to exercise the option. The court held that no such requirement existed under that retainer, which was limited to advising on the issue of the liability for carpet replacement, nor did it arise merely because their advice concerned events that would occur only upon renewal of the lease.
The court concluded that the solicitors did not breach the terms of their retainer nor the duty of care they owed to the owner.
For further information on this topic please contact Katerina Petrogiannakis or Toby Mittelman at Arnold Bloch Leibler by telephone (+61 3 9229 9779) or by fax (+61 3 9229 9889) or by e-mail ([email protected] or [email protected]).
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