Property development: all reasonable endeavours; good faith and mutual benefit obligations
The High Court in Brooke Homes (Bicester) Ltd v Portfolio Property Partners Ltd  EWHC 3015 provided guidance on what is meant by ‘all reasonable endeavours’, ‘good faith’ and ‘mutual benefit’. The decision of the High Court is a reminder that parties should fully understand the extent of their contractual obligations and the consequences of failing to comply with these clauses in an agreement.
In 2015, the claimant Brooke Homes (BHB) entered into binding heads of agreement with the defendants, Portfolio Property Partners Ltd (the P3 Group) to purchase land at Himley Village, Bicester for the purpose of zero-carbon residential development. The parties agreed that BHB would purchase land from the P3 Group portfolio for the development of an “eco-town”.
Under the agreements, the parties were both obligated to use all reasonable endeavours and act in good faith to enter into a conditional sale agreement (CSA) to document the land purchase. The agreement also included a mutual benefits clause which allowed the transaction to be structured in a manner that achieves the desired commercial and financial outcome for the parties. However, the negotiations took over 2 years and by the end of 2017, the parties had not concluded the CSA. Thus, BHB brought proceedings against the P3 Group for breaching their contractual obligations in respect of the agreement.
The court held the P3 Group liable for breach of its positive obligations, which deprived BHB of the chance to secure a CSA and as a result BHB was awarded £13.4 million in damages.
Determining the liability of the P3 Group for breaching their contractual obligations required a consideration of the law on endeavours clauses, in particular the practical use of an ‘all reasonable endeavours’ clause.
‘Endeavours’ clauses are often included in agreements in order to define the scope of the party’s obligations. The High court judgment outlines the three categories of endeavours clauses, including: ‘reasonable endeavours’, ‘all reasonable endeavours’ and ‘best endeavours’.
This requires the obligor to achieve an even balance between their contractual obligations and their own commercial interests. The party is generally required to take one reasonable course of action which would not sacrifice their commercial interests.
A party must use its best efforts to satisfy the obligation, which can often require the obligor to act against its own commercial interests. The use of this endeavour allows the party to take all reasonable courses of action rather than one. Although this obligation is onerous, it is not regarded by the courts as absolute and is subject to reasonableness.
All reasonable endeavours
The court in the BHB case held that to satisfy an obligation to use all reasonable endeavours a party must use active endeavours, meaning all reasonable paths, or actions must be exhausted for the duty to be adequately discharged.
The judge considered that the precise scope of the obligation is dependent on the context in which the wording arises, thus, “some subordination of commercial interests may be required” for all reasonable endeavour clauses. The court decided that, in this case, the clause did not go so far as to require either party to ignore their own commercial interests, but they were required to have regard for the other party’s commercial interests, their mutual benefit as well as the desired outcome.
The lack of a plan from the P3 Group regarding the land, which is intended to be sold to BHB, amounted to a breach of obligations as the CSA could not be concluded. Moreover, there was evidence that the P3 Group had unilaterally decided that it was in its best commercial interests to negotiate the sale of the land, within the agreements, with alternative parties. The judge decided that this constituted a breach of the duties to use all reasonable endeavours and act in good faith as well as a breach of the exclusivity restrictions.
What constitutes ‘good faith’ is dependent on the wording and context of the agreement and its obligations. In the BHB case, the judge summarised duty of good faith as requiring; a duty to act honestly, the observation of reasonable commercial standards of fair dealing, faithfulness to the contractual or agreed purpose and to act consistently with the justified expectations of the parties.
The P3 group were found to be in breach of their good faith obligation as they had entered into negotiations and agreements with alternative parties despite the existing exclusivity agreement with BHB. By entering into new negotiations with third parties, the P3 group were not faithful to the contractual purpose and expectations of BHB to secure a CSA for the purchase of the land.
A mutual benefit clause does not require one party to ignore their own commercial interests, however, the judge in the BHB case concluded that it does require that they have regard for the other party’s commercial interests to the desired outcome and their mutual benefit. The judge considered that a mutual benefit clause can require a party to agree reasonable variations and modifications to the terms, that are of no substantial detriment to the other party. A mutual benefit clause also identifies whether a party has withdrawn from the contemplated transaction and if the obligations of the agreement have been discharged.
What does this mean?
The BHB case highlights the risks of including obligations to use all reasonable endeavours and to act in good faith in entering into an agreement for the sale of land. If a party is found to have breached the obligations, then the courts can award substantial damages for loss of opportunities. To overcome this risk, for future property development contracts parties should:
- Consider agreeing what specific actions they are prepared or unwilling to take and set them out in documentation.
- Although this may be tedious and involve difficult drafting, merely relying on an ‘endeavours’ clause can bring unexpected and adverse consequences for one party, as it did for the P3 Group.
- Be aware of the differences between ‘best endeavours’, ‘reasonable endeavours’ and ‘all reasonable endeavours’, as well as the significance of the contractual context.
- Be specific as to the duration of the ‘endeavours’ obligation, here the parties failed to make an express time limit which meant that the judge used the ‘exclusivity period’ instead.
Overall, the High Court decision suggested that ‘all reasonable endeavours’ goes beyond reasonable endeavours and may be more similar in nature to best endeavours, provided the context of the agreement. Therefore, the case highlights the importance of assessments being made on a case-by-case basis, taking significant regard to the wording and context of the provisions.