Key point

  • Whether a proposed transaction involves a lease or any other form of contract, keeping an eye on dates is crucial. If the duration of liabilities or entitlements is tied in with actual completion, a delay in completion will result in the timeframe for those liabilities or entitlements shifting as well.

Background

When negotiating heads of terms for a transaction, it is quite common for the parties to agree various matters based on the date of completion of the deal. What will be the liability period under any construction warranties, for example? When will the tenant's rent-free period start and finish? For how long after completion will the buyer be able to hold on to money retained from the seller out of the sale proceeds?

If the completion date is delayed, it might be wholly in order for the rights and obligations being created in the documentation to "shift" with the timetable. But it is something to be aware of: in certain circumstances, the commencement - and end - date of the rights and obligations might need to be revisited immediately prior to the lease or contract or warranty being entered into.

The risk of increasing, overall, the length of a period of obligation or entitlement tends to arise where the parties are already "doing" something before the formal documentation is completed. If a new building is put up, but the contractor's warranty is not given until several months later, the six or 12 year period under that warranty might inadvertently only start once the warranty is formally completed, rather than on the date when the building works finished.

In a landlord and tenant context, the tenant might have been allowed early access to the premises before the lease is completed. Does that mean that the tenant's liabilities should run from the date of access, or only from when the lease is completed? This will depend on what the parties agreed at the heads of terms stage, and the precise drafting of the ensuing documentation.

Where does the danger lurk?

The decision in the case of Xenakis and Corke v Birkett Long LLP provides an example of how easily things can go wrong. In September 2005, the landlord and tenant to a proposed letting agreed heads of terms. One of these was that the landlord would require the two directors of the new-created tenant company to give personal guarantees. Those guarantees would last for three years, and would include the usual provision that the directors could be called on to enter into a new lease of the premises in the event that the tenant company became insolvent and the lease was disclaimed. The term of years under any such new lease would be for whatever then remained of the term originally granted to the tenant.

On 19 January 2006, the tenant company - and the guarantors - executed the counterpart tenancy documentation in anticipation of completion, which was expected to take place the next day. Unfortunately, the next day came and went. Instead of completion, the news arrived from the landlord's solicitors that neither its client nor the management company had executed their part of the documentation.

It was therefore agreed that, as long as the tenant's solicitor sent across the executed counterpart documents, together with various sums that the parties had agreed would be paid at completion, the keys would be released and the tenant would be allowed into occupation; formal completion would take place in due course, once the original part documents had been signed. The tenant was duly granted access the following Monday morning, 23 January 2006.

The lease was not actually completed until 15 December 2006, some 11 months later. The tenant had been in the unit and (following some initial fit out works) trading for all that time. The term commencement date of the lease was stated to be the date of the tenant's first occupation; the rent-free period expired six months after that. However, certain other dates in the lease were tied in with the completion date of the document, rather than with the date when the keys were released.

One example of this was the duration of the guarantees given by the directors, Mr Xenakis and Mr Corke. The wording of the lease meant that the three year guarantee period started to run only as of the date of the lease. If it, too, had also been tied to the term commencement date, almost a third of the liability period would already have passed by the time the lease was completed.

By November 2008, the tenant's business wasn't doing so well - a new restaurant, launched against the backdrop of a recession. The guarantors were under the impression that their guarantees would expire in only a few months' time, ie three years after January 2006. In fact, there were still another 13 or so months to go: the guarantees weren't due to expire until December 2009.

As mentioned above, the guarantee clause included the relatively standard requirement that the landlord could require the guarantors to take a fresh lease of the premises, for whatever was the unexpired residue, if the tenant company became insolvent and the lease was disclaimed during the guarantee period.

Therefore, Messrs Xenakis and Corke had to keep the business going until the guarantee period expired, rather than allowing the restaurant to fail early on in the following year. If they had wound up the tenant company in January 2009, they would have had to accept a replacement lease - granted to them personally - for the 17 years remaining.

Things to consider

Delays in completion can sometimes mean that things get forgotten, or missed. Often in practice, no adverse consequences will flow from the delay. However, as this case illustrates, the sheer existence of a delay can be a good reason to revisit original timelines and agreements: not necessarily for the purpose of renegotiation, but just to double-check the effects of the delay.

Once the documentation has been formally completed, the terms of the deal are set in stone unless an order for rectification is made by the court. It has to be better to spend time reviewing the situation prior to completion, than spending time - and therefore money - afterwards in trying to sort out unexpected consequences.