The recent case of Brooke Homes (Bicester) Ltd v Portfolio Property Partners Ltd & Ors demonstrates the importance of careful drafting in pre-contract documents. In this case, the Seller (Portfolio Property Partners) fell foul to the use of the phrase “all reasonable endeavours” in a Heads of Terms contract.

This case also highlights the importance of ascertaining the true nature of any terms in any heads of terms agreed in contractual negotiations to ensure that they do not amount to enforceable contractual terms in themselves.

Background

Brooke Homes (“the Developer”) intended to purchase land from Portfolio Property Partners (“the Seller”) for development of an ‘eco town’ in Bicester. The parties agreed Heads of Terms and entered into two associated contracts (“the Agreements”) with the intention of entering into a conditional sale agreement (conditional on grant of planning permission and other conditions) “the Conditional Sale Agreement”.

The Agreements provided that both parties would use “all reasonable endeavours” to enter into the Conditional Sale Agreement. An obligation to use “all reasonable endeavours” can be particularly onerous, as demonstrated by this case.

A number of years after entering into these Agreements (despite planning permission being granted) no conditional sale agreement had been agreed. The Developer issued proceedings for breach of contract and the Seller was found to be in breach of their obligation to use “all reasonable endeavours” to enter into the Conditional Sale Agreement.

Heads of Terms

Unusually, in this case there was no question that these Agreements were legally binding documents.

Although heads of terms do not usually legally compel parties to conclude a transaction on those terms (or even at all), in this case, as both parties entered into two associated contracts with the Heads of Terms, certain terms within them became legally binding.

It is therefore important that parties consider the true nature of terms used within such agreements and should be careful when entering into associated contracts with heads of terms so that they do not become legally bound to comply with terms they have no intention of, or are unable to, comply with.

“All Reasonable Endeavours”

In this case the judge stated that an “all reasonable endeavours” obligation requires active endeavours by the party bound by it. Passivity or inactivity is likely to be construed as a potential breach of such an obligation.

Here, the Court held that the Seller had breached their positive obligations to use “all reasonable endeavours” to negotiate the Conditional Sale Agreement and particularly noted that:

(1) the Seller had failed to provide a plan of the land to be transferred (despite the draft conditional sale agreement allowing for any plan provided to be amended if necessary once the contract had been entered into)

(2) the Seller was in advanced negotiations with other parties regarding the sale of the land (on terms which were potentially more favourable to it)

Failure to do such things breached the Seller’s positive obligations and amounted to a breach of contract.

Interpretation of Endeavours Clauses

In concluding the case, the judge provided a summary of the meaning of endeavours clauses which may be a useful starting point for considering the impacts of agreeing to such obligations:

• reasonable endeavours: “if one reasonable path is taken, then the obligation is discharged”
• all reasonable endeavours: “all reasonable paths or actions to be exhausted”
• best endeavours: although some cases suggest that there is not much difference between “all reasonable endeavours” and “best endeavours”, however some “best endeavours” clauses might require the sacrifice of some commercial interest whereas “all reasonable endeavours” is unlikely to do so

However, it is important to note that endeavours clauses will not always be strictly applied in accordance with these interpretations and will vary on a case by case basis. If you are entering into a contract that contains an endeavours clause, it is important that you consider the full implications of such clause in the context of your contract.

It is also important to consider the true nature of any documents at all stages of a transaction to ensure that documents not intended to become legally binding do not do so inadvertently.

If you require further advice regarding endeavours clauses or any other Real Estate matter, please contact our Real Estate.