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An expensive endeavours obligation: £13.4m cautionary case for landowners, developers and contractors

Blurred-contractor-team-is-brainstorming-at-the-far-end-of-home-developer-desk-with-constructoion-tools-with-light-flare-from-the-windows Print publication

13/12/2021

Why is Brooke Homes (Bicester) Ltd v Portfolio Property Partners Ltd & Ors of interest to landowners and developers?

Contracts relating to the development of land and property commonly include promotion agreements, joint venture arrangements, overage provisions, agreements for sale and options to purchase, among others. Very often, several such contracts will be involved in any one development project. Development contracts, and the schemes that they underpin, are usually high value. Each development and the issues that arise are particular to their own site and factual circumstances, and they are often complex and fraught with risk. It is also notoriously tricky to cater in the contract for unknown future events; for parties with changing and potentially conflicting interests; and to cover all possible eventualities. In addition, at the outset of any development venture, when landowners, developers, and perhaps other joint venture partners consider doing business together, a multitude of enquiries, discussions and negotiations take place before any deal is finalised. Binding obligations can come into being formally in preliminary contracts and ‘heads of terms’, or informally (and sometimes inadvertently) as a result of oral commitments.

For all of these reasons, the negotiation of development arrangements can be a legal minefield, and the consequences of getting the contractual position wrong can be devastating. Walker Morris has previously provided legal and practical guidance on several key areas [1]. In this briefing, we offer advice arising from a recent case which considers, in particular, obligations to negotiate (including endeavours and good faith clauses).

The court decided, in Brooke Homes (Bicester) v Portfolio Property Partners [2], that the landowner/developer was liable to pay breach of contract damages of £13.4 million to the development contractor in respect of its lost chance to complete a conditional sale contract. The case is a cautionary tale of the importance of negotiating, understanding and complying in full with development contract obligations.

What legal and practical advice arises?

  • Some of the key terms which the claimant alleged had been breached in the Brooke Homes case were in a document entitled ‘Heads of Agreement’. There was no dispute in the particular case that the Heads of Agreement was a binding contract but in many-a project, heads of terms or heads of agreement are not intended to be legally binding, and do not therefore have contractual force/cannot be sued upon. The primary point to note, therefore, is that parties should ensure, on every project, that they ascertain the true nature of any heads of terms agreed in contractual negotiations, and whether or not they amount to enforceable contractual terms in themselves (pending completion of any subsequent formal contract documents).
  • Many commercial contracts contain obligations on a party to use its best or reasonable endeavours to do something or to bring about a certain outcome; but what does that really mean? The phrase ‘best endeavours’ imposes the highest endeavours obligation on a party. A party that has assumed a ‘best endeavours’ obligation should take steps which a prudent, determined and reasonable beneficiary of the obligation, acting in its own interests and desiring to achieve that result, would take and so must exhaust all of a number of reasonable courses which could be taken in a given situation to achieve a particular aim.  The line between a ‘best endeavours’ obligation and an ‘all reasonable endeavours’ (as opposed to the lesser ‘reasonable endeavours’) obligation can be blurred. In many practical scenarios, there will be little difference between what a party is required to do under a ‘best’ or an ‘all reasonable’ endeavours clause.
  • In fact, Brooke Homes potentially suggests that an ‘all reasonable endeavours’ clause is even closer to that of a ‘best endeavours’ clause than prior authority had ever indicated. In relation to ‘all reasonable endeavours’ clauses, the judge confirmed: “there is little difference with such a clause and the duty to use best endeavours” and that: “active endeavour is required on the part of the parties where all reasonable endeavours are required: passivity or inactivity is likely to be construed as a potential breach.” As such, contracting parties would be well advised to approach ‘all reasonable endeavours’ clauses with real caution – even to treat them as tantamount to requiring the highest possible endeavours, and to comply accordingly.
  • The contractual arrangements in the Brooke Homes case also contained obligations on the parties to act in good faith and to structure the transaction in a manner which most effectively achieved the desired commercial and financial outcome for both parties, for their mutual benefit. What is required of a party under an endeavours obligation will always depend on the express wording of the contract and the facts and circumstances of the particular case. In Brooke House, not only was the court willing to acknowledge and enforce the good faith and mutual benefit obligations, but also it took those and the parties’ overall respective positions into account when ascertaining the meaning and reach of the ‘all reasonable endeavours’ clause.
  • Endeavours clauses are great for getting draft contracts agreed quickly and for giving ‘wiggle room’ to the person with the obligation. However, they should not be viewed as a straightforward and easy option. Endeavours clauses can simply delay the argument from the contractual negotiation to the mid-project stage or, worse, they can even prompt a dispute down the line when parties’ priorities change and relationships deteriorate.
  • It may be preferable, in many cases, to expressly set out in the contract documentation the specific obligations and measurable objectives the parties are expected to achieve. Ideally, provisions should include clear and specific timescales within which steps are to be taken (and what those steps should be), conditions are to be met, obligations are to arise, and payments are to be made.  Where appropriate, consideration should be given as to whether there should be included formulas for ascertaining values, mechanisms for enforcing obligations and for resolving disputes, and longstop dates.
  • Even in cases where the drafting is comprehensive, commercial contracting parties should take care to ensure that obligations are complied with, strictly and in a timely fashion, and should keep records of their actions so that evidence of compliance can be adduced if necessary.

What happened in the particular case?

The defendant group of companies built up a portfolio of strategic land, applied for planning permission to develop an ‘eco-town’ and entered into various contractual arrangements with the claimant development contractor. Those arrangements included the commitment to use all reasonable endeavours to enter into a conditional sale agreement, to act in good faith, to observe certain exclusivity provisions and to structure the overall transaction to the parties’ mutual commercial and financial benefit.  After two years or so had passed, however, and despite outline planning permission having been granted, the parties had failed to complete the sale agreement and relationships had begun to break down. In fact, the defendant had failed to progress matters and had commenced potentially more favourable commercial negotiations with other parties. The claimant therefore sued for breach of the exclusivity, reasonable endeavours, good faith and mutual benefit provisions. The court found for the claimant and awarded damages of £13.4 million – the sum at which the court valued the claimant’s lost chance to complete the conditional sale agreement.

How we can help

Charlotte Spowage and Claire Acklam advise on all aspects of housebuilder/developer issues, respectively from the transactional/project management and the risk management/dispute resolution perspective. If you would like any further advice or information in relation to any of the issues covered in this or our earlier development contract briefings, or if you would like to discuss any particular site, project or any potential case or concern, please do not hesitate to contact Charlotte or Claire, both of whom will be very happy to help.

 

[1] See our earlier briefings for more detailed advice on development contracts and:

Endeavours obligations

Contractual interpretation and pre-contract communications

Contract formation

Mistake and misrepresentation

 

[2] [2021] EWHC 3015 (Ch)

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