Development Agreements and Endeavours Obligations

In the realm of commercial real estate development, the terms "all reasonable," "reasonable," and "best" endeavours are more than just legal jargon—they are pivotal in defining the level of effort and commitment required under your contracts. Mastering these distinctions can help avoid costly legal disputes and ensure the smooth execution of your projects. This article aims to demystify these terms, providing you with practical insights on how to effectively incorporate them into your development agreements to streamline operations, mitigate risks, and enhance strategic planning.

Reasonable Endeavours

Imagine you are a developer working on a commercial real estate project. You promise to make a reasonable effort to secure the necessary planning permissions for the development. However, you do not guarantee that you will overcome every obstacle in order to obtain planning permission. You will take necessary actions within reason, such as submitting applications, attending meetings with planning authorities, and addressing reasonable concerns raised by stakeholders. However, you won't go to extreme lengths, such as engaging in protracted legal battles, appealing refusal of the planning application, or incurring exorbitant costs that could jeopardize the project's viability.

Agreeing to use "reasonable endeavours" in this context implies a commitment to making an effort, but it acknowledges that there are limits and constraints. The party making this commitment agrees to do what a reasonable developer, under similar circumstances, would do to fulfil their obligations. A party may balance its reasonable endeavours obligation against "all relevant commercial considerations" (such as its relations with third parties, its reputation, and the cost of particular courses of action) as well as the likelihood of success of a particular course of action to achieve the objective.¹  Additionally, such a party is likely required only to take one reasonable course of action, rather than every conceivable course open to it.²

Best Endeavours

Now, let's raise the stakes. Imagine you are the same developer, but this time you promise to do everything in your power to complete the development on time and within budget. You will leave no stone unturned, exhaust all options, and push yourself to the limit to ensure the project's success. This might involve working around the clock, hiring additional contractors at short notice, or even incurring significant financial costs to overcome unexpected challenges.

Agreeing to use "best endeavours" sets a higher standard of commitment. It requires the party to pursue the obligation with the utmost diligence and persistence, sparing no effort to achieve the desired outcome. Unlike "reasonable endeavours," there's an expectation of going above and beyond what might be considered standard or ordinary and to take all reasonable courses of action reasonably open to it (bar where a course of action is futile or a party is simply repeating action already taken)³. This may involve financial sacrifice or significant inconvenience, provided that such actions are not commercially unreasonable.⁴

All Reasonable Endeavours

It has been suggested that there is no real difference between "best endeavours" and "all reasonable endeavours".⁵ However, the generally accepted view is that "all reasonable endeavours" sits between "best endeavours" and "reasonable endeavours" – although where exactly is much debated.

As with reasonable endeavours, case law indicates that, unless the wording of the specific obligation suggests otherwise, the court will consider, objectively, how a reasonable developer would act in the same circumstances and position of the relevant party.⁶ Additionally, the courts have found that whilst "some subordination of commercial interests may be required" it is "less likely" for an all reasonable endeavours obligation to require the sacrifice of commercial interests than a best endeavours obligation.⁷

Tips on how to use endeavours obligations effectively

Ultimately the action you are required to take will depend on the circumstances you find yourself in, the specific wording and commercial objective of the development contract, the specific obligation to which the endeavours obligation is attached, and the surrounding factual matrix. What may be "reasonable" on the facts of one case, may not be reasonable in another.

It is therefore important that you are intentional when using the terms "all reasonable," "reasonable," and "best" endeavours in your development contracts. We share below some tips on how best to protect your position when negotiating endeavours obligations:

• Outline specific actions or steps

When a contract specifies particular actions for fulfilling an endeavours obligation, the obligor must follow these steps, even if it means sacrificing some of their own commercial interests. Clearly outlining these actions in the contract helps ensure that all parties understand their responsibilities and can avoid potential disputes.

• Specify timing for obligations

Including target dates and long stop dates for when obligations must be met can provide clarity and structure. This helps ensure that all parties are aware of the timelines and deadlines they need to adhere to, reducing the risk of disputes over whether an obligation has been met within a reasonable timeframe. Clear timing provisions also help in managing expectations and planning resources effectively.

• Include an Interpretation Clause

Include a clause that defines the expected level of effort from each party and how an endeavours obligation should be interpreted. This clause should specify the extent to which a party can consider its own commercial interests and the need to explore various options. By clarifying these points, the clause minimizes disputes and ensures parties understand their responsibilities.

• Include a dispute resolution clause

Consider incorporating a dispute resolution clause to address any conflicts regarding endeavours obligations. Instead of defaulting to traditional litigation, parties can opt for a specific mechanism, such as expert determination. This method involves disputes being resolved by an expert with relevant experience rather than a judge or arbitrator. It often proves to be a faster, more cost-effective, and efficient alternative to conventional litigation or arbitration.

• Tailor the obligation

It is important to ensure that endeavours obligations are tailored to fit your particular circumstances. In the context of development agreements, you will likely want to consider the project's scope and risks as well as your commercial interests, before settling on the most appropriate endeavours obligation.

Conclusion

Selecting the right level of commitment—whether "reasonable," "best," or "all reasonable" endeavours—depends on the specifics of each development agreement and your risk tolerance. Working with legal advisors to define these obligations clearly and tailor them to fit the specific needs of your project is essential for setting realistic expectations, protecting your interests and minimizing costly disputes and delays.