Play it by the book or pay the price

The dangers that can arise when those involved in a deal jump the gun and fail to wait for completion of legal formalities have seldom been better illustrated than in the recent High Court case of Fordgate Wandsworth Ltd v Bernard Neville & Co and Teacher Stern Selby.

The case involved surrender by retailer Budget Books of a unit at the Arndale shopping centre in south London, which is owned by Fordgate and managed by Bernard Neville.

Bernard Neville agreed to a deal in 1996 under which Budget Books would pay a reverse premium of £100,000 to Fordgate for the early formal surrender of the lease.

The date set for the surrender to be completed was 19 January 1997, and law firm Teacher Stern Selby was instructed to draw up documentation.

However, Teacher Stern Selby thought it had until the end of January to complete the documentation. But on 16 January, without consulting Teacher Stern Selby, Bernard Neville sent written instructions to the centre manager to take the keys from Budget Books on 19 January.

In fact, an extra day was allowed for Budget Books to clear the premises and the keys and the lease were handed over to the centre manager on 20 January with a covering letter stating that the surrender was taking place as required by Bernard Neville.

However, no formal deal had been reached for the payment of the £100,000 reverse premium.

Teacher Stern Selby confirmed by letter dated 24 January to the tenant that a surrender by operation of law had taken place.

As a result, Fordgate sued Budget Books in a bid to recover the money it had lost and Bernard Neville for negligence. Bernard Neville brought Teacher Stern Selby in as a third party, forcing Fordgate to make it second defendant in the action.

Teacher Stern Selby was cleared by Mr Justice Lloyd of any blame. The firm was acting under instructions and in those circumstances could not be held to have been negligent, the judge said.

However, Bernard Neville was held liable.

Judge Lloyd held that Bernard Neville was negligent for instigating recovery of the keys without checking with the solicitors that it should do so. He said the handing back and acceptance of the keys before the deal had been formalised made it impossible for Fordgate to obtain the full £100,000 premium.

Dellah Gilbert of Lovell White Durrant, which represented Teacher Stern Selby, says the case illustrates the dangers facing landlords when negotiating formal surrender of property from tenants. It also highlights a number of areas relating to client care.

Gilbert says: "What happened was that circumstances which could be interpreted as effecting a surrender by operation of law arose while the landlord was still negotiating a formal surrender with a valuable premium attached."

The landlord's solicitors took the view that such a surrender had taken place and confirmed this to the tenant.

"The case serves as a worthwhile reminder that solicitors should obtain either general instructions as Teacher Stern Selby had, or seek specific instructions before a decision is acted upon.

"In any transaction where there are a number of advisers of different disciplines, it is essential that they keep in touch at every stage. Bernard Neville and Teacher Stern Selby had been working towards different completion dates following an earlier management meeting.

"Bernard Neville thought it had to complete by 19 January and Teacher Stern Selby by the end of the month at the latest.

"Minutes of that meeting were not circulated until two days after 20 January. If the minutes had been made available earlier and checked by all parties who had attended the meeting, the discrepancy could well have been spotted and corrected.

"It is a common mistake to act in haste only to repent at leisure. Therefore, it is imperative that at each stage of a transaction, advisers assess first whether the next step they are to take will truly achieve their client's commercial objective."