Failing to ensure that an LLP is incorporated before it enters into other agreements or at least advising of the risk of executing those documents before incorporation is a breach of a solicitor’s duty of care to its client.
The Commercial Court has considered this issue in Milford Investments Ltd v Lanyon Bowdler LLP [2024] EWHC 3227 (Comm).
The case concerned the development of a plot of land of 1.88 acres near Oswestry in Shropshire which its owners intended to develop. Subsequently, 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 on the land 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.
Subsequently, the owners decided not to pursue the joint venture and, because a conflict of interest then arose, the defendant ceased to act for them. The owners instructed other solicitors who argued the agreements were unenforceable because the LLP had not been incorporated when they were executed. The owners sold the development land to a third party which completed the development.
The claimant sought damages for losses sustained by the defendant’s failure to ensure the LLP was incorporated prior to the other agreements being signed which enabled the owners to withdraw from them.
There was a legitimate debate about 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 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.
Louise Clark is a property law consultant and mediator
