This case involved a development contract for land in Oxfordshire. The defendant built up a portfolio of land which was to be developed as an eco-town.
The developer entered into contracts with a development contractor. The contract included a contractual obligation: (1) to use 'all reasonable endeavours' to enter into a conditional sale agreement; (2) to act in good faith: (3) to observe exclusivity obligations; and (4) to structure in a way that was mutually beneficial.
Two years passed and, despite an outline planning permission, the parties failed to complete the sale and the relationship between the parties broke down. The defendant had commenced negotiations with other more favourable parties and the claimant sued for breach of contract – namely breach of the exclusivity obligations, reasonable endeavours obligations, good faith and mutual benefit clauses.
The court found in favour of the claimant, awarding damages in the sum of £13.4m (based on the loss of opportunity to complete the agreement).
This shows the danger of entering into detailed obligations and not complying with them to the letter:
- look out for Heads of Terms – in this case there were 'Heads of Agreement' which formed part of a binding contract.
- It is extremely important to make clear as to whether or not heads of terms form part of the contract. Heads of terms should contain protective wording (e.g. Subject to Contract).
- where there are 'reasonable endeavours' obligations it is key to understand what this means so the person who is bound understands how hard they have to work – Here it should be noted the judge flagged that there is little difference between reasonable endeavours and best endeavours.
- The safest approach is to treat reasonable endeavours as equivalent to best and operate accordingly, that way the parties are protected against allegations of breach.
- the steps required depend on the wording, the facts and the circumstances – In this case the courts were clearly willing to enforce 'good faith' and 'mutual benefit' provisions and it took these provisions into account when considering the 'all reasonable endeavours' obligations.
- whilst 'reasonable endeavours' may seem like an appealing fix in order to get a contract exchanged they come with a downside including the consequences of failure to observe, misunderstandings as to the 'seriousness' of such obligations, simply kicking the ball down the road.
- it would be better to agree the obligations up front and whilst this might seem like hard work at the time, specific obligations, timescales and objectives (with metrics for measurement) will help reduce disputes, or make any disputes more clear cut.
- where there are complex obligations, it is key to keep track of obligations.
- a timeline and underlying evidence is advisable, also look out for termination and longstop provisions – these should be built into the timeline too.
In conclusion complex development obligations should always be carefully considered by the parties and drafted with an appropriate level of detail to give certainty and clarity.
If you are a public body or a developer who has agreed to enter into a development contract, you should contact a member of our UK real estate team for assistance.
Authors: Julie Simms, Lee Pickett, Tom Hubbard and Mathew Abiagom