Perplexed by property law? Our Professional Support Lawyer Gemma Cook is here to answer your most pressing questions…
I entered into an agreement with a developer and I am under an “all reasonable endeavours” obligation to enter into a conditional sale agreement to sell a parcel of land to the developer and that I’ll act in good faith. What does this mean I should be doing?
It is very common for all types of property agreements to oblige one party to do something which, at the date of the agreement, cannot be precisely defined or listed out. In this situation, a clause that requires one party to act towards the other in ‘good faith’ or to use ‘all reasonable endeavours’ to deliver an outcome is often used. These types of clauses are often quickly agreed, give the parties a little room for manoeuvre and allow the documents to be finalised swiftly.
However, these clauses can leave the delivering party a little unclear as to what they should be doing. The courts will seek to find meaning and purpose to obligations that have been imposed upon one party for the benefit of another. One recent example of this is the case of Brooke Homes (Bicester) Ltd v Portfolio Property Partners Ltd & Ors [2021] EWHC 3015 (Ch) where the court provides a helpful summary of these obligations:
1) To use ‘reasonable’ endeavours – meaning one reasonable path is taken to discharge the obligation.
2) To use ‘all reasonable’ endeavours – this differs to the above in that all reasonable paths or actions must be exhausted. This requires active endeavour and any inactivity or passiveness is likely to be a result in breach.
3) To use ‘best endeavours’ – all steps within the ability of the obliged party capable of producing the desired result should be taken to comply with a best endeavours obligation. An ‘all’ reasonable endeavours obligation is now interpreted as being broadly similar to that of a ‘best’ endeavours obligation but is it possible that a ‘best’ endeavours clause might be seen as requiring a party to sacrifice some of its commercial interests, whereas an obligation to use ‘all’ reasonable endeavours is probably less likely to require that.
Given the blurred line between an ‘all’ and a ‘best’ endeavours obligation, a party should proceed with caution and not assume that an ‘all endeavours’ imposes a lesser obligation.
In the Brook Homes case, the ‘all’ reasonable endeavours to enter into a conditional sale agreement to sell a parcel of land was breached as the defendant failed, despite requests from the claimant, to provide a definitive plan of the area to be acquired or to agree a mechanism to identify precisely the area of land. These failures prevented a contract being completed. There was also a desire on the part of the defendant to deal with a third party.
The interpretation of a good faith clause will also depend upon the terms of the remainder of the agreement. Good faith clauses are generally interpreted as preventing action that frustrates the purpose of the agreement. Cases such as Brook Homes are helpful to the interpretation of a good faith clause but do not provide concrete meaning to the obligations that have been assumed by the parties.
In Brook Homes, the defendant was ordered to pay damages, based on the loss of a chance for the claimant to enter into the contract, of £13.4 million so the consequences of non-compliance can be large.
A party that is subject to any form of endeavours obligation should take proactive steps to achieve the desired result. Any attempts to delay or procrastinate (whether deliberate or not) are likely to be deemed to be a breach. Instead, in order to demonstrate compliance, a party should:
1) Try to be upfront when negotiating the obligation in the first place. If it’s known at the time that a party does (or does not) intend to do something, be specific and agree that ahead of time;
2) Keep a record of the decisions made and the reasoning on why they have (or have not) decided to take one route rather than another; and
3) Keep a record of the actions taken and make sure it is up to date to demonstrate what they have done to comply should they ever be called upon to prove it.
These types of clauses are part and parcel of most legal agreements as they are necessary in situations where it is impossible to provide for every eventuality that might be required ahead of time but they do come with an element of risk for all parties concerned.
Key points
- There are three types of endeavours clauses:
- ‘reasonable’ endeavours;
- ‘all’ reasonable endeavours; and
- ‘best’ endeavours.
- Each has a subtly different meaning as to how much activity is required to deliver the desired outcome.
- They are great clauses when it is not clear exactly what needs to be done to deliver the desired outcome, however, this is also the inherent risk in using them.
- The courts will look to hold the parties to the obligations that they signed up to even though what is required of the relevant party will depend upon the context of the obligations and how things play out over time.
- If a party knows what it does (or does not) intend to do something, it might be best to get that agreed up front.