“Endeavours” Clauses in contracts for the assignment of leases 0 Comments

“Endeavours” Clauses in contracts for the assignment of leases

Proposition:  An obligation (such as to be found in the Standard Conditions of Sale (Fifth Edition)) on the part of the assignor of a lease to use “reasonable endeavours” (or “efforts”) to obtain the consent of the landlord could well oblige the assignor to apply to the court for a declaration that the landlord is acting unreasonably where there is reasonable ground for believing that to be the case.

There has been much comment in the legal press and online about clauses under which a party to a contract agrees to use “best”, “reasonable” or “all reasonable” endeavours to bring about a particular result.  The particular case examined here concerns the assignment of leases, but some general comments on the existing law regarding endeavours covenants provide the background and may be useful for non-lawyers.

This has always been a difficult subject, and one which property lawyers frequently experience in practice.  Much of the recent comment has been stimulated by the decision of the Court of Appeal in the case of Jet2.com Limited v Blackpool Airport Limited [2011] EWHC 1529, where the Court decided that an obligation on the part of a contracting party to use “best endeavours” could in some circumstances require the obligated party to act against its own commercial interests in achieving the required result.  “Could in some circumstances” are important words, as there is no absolute rule.  In the Jet2 case the court emphasised that there must always be a degree of uncertainty, given that the meaning of an endeavours clause must be assessed at the time the contract is formed by reference to its terms, the other provisions of the agreement and the surrounding commercial context.  The Court said:-

The meaning of the expression” (in this case best endeavours) “remains a question of construction not of extrapolation from other cases … the expression will not always mean the same thing.

Endeavours clauses are frequently Contractused in property documents in circumstances where the obligated party is unable to guarantee a result but only to “try” to do so.  The party benefitting from the obligation will usually seek a “best endeavours” covenant; that is certainly the strongest.  The other party may well try to change this to “reasonable endeavours” and very often the parties’ compromise by agreeing on the expression “all reasonable endeavours”.  To comment in detail on the different requirements (particularly having regard to the uncertainty referred to above) would take up more space than this post allows (and would have to include reference to innumerable cases).

I will limit my comments, therefore, to a situation with which most property lawyers will be familiar; a contract for the assignment of a lease where the assignor agrees to use some kind of endeavours to obtain the consent of the landlord to the assignment.  The question frequently arises whether, if the landlord unreasonably withholds consent, the assigning tenant would under the terms of his obligation be required to make an application to the court for a declaration that consent was being unreasonably withheld.

I think it goes without saying that no endeavours obligation would in the circumstances postulated require the assigning tenant to enter into litigation with the landlord if the landlord had demonstrably reasonable grounds for the refusal of consent; I do not think any form of obligation would be construed as requiring the obligated party to enter into litigation which he was more or less bound to lose.

The following comments therefore are limited to a situation where there is at least a serious doubt as to whether the landlord’s grounds of refusal are reasonable (and of course nothing that follows would be relevant where the prohibition against assignment in the lease was an absolute one rather than one which simply required the landlord’s consent – in the latter case s.19(1) of the Landlord and Tenant Act 1927 will apply an obligation on the part of the landlord to act reasonably even if the relevant clause does not include the words “such consent not to be unreasonably withheld” or similar, but s.19(1) does not apply to absolute prohibitions).

To Let BoardsThe Standard Conditions of Sale (Fifth Edition) are usually incorporated in contracts for the disposition of both freehold and leasehold property, although they are frequently modified.  Condition 8.3 deals with landlord’s consent.  In passing (though not relevant to the question under consideration here) the wording of Condition 8.3.1(a) is interesting; would an absolute prohibition against assignment be covered by the words “the following provisions apply if a consent to let, assign or sub-let is required to complete the contract”?  It could be argued that the wording would apply to an absolute covenant, on which basis it might have been better if Condition 8.3.1(a) were worded “the following provisions apply if the lease contains a covenant prohibiting the assignment of the lease without the consent of the landlord”.

Be that as it may, where Condition 8.3 applies un-amended, the assignor’s obligation under Condition 8.3.2 is “to apply for the consent at his expense, and to use all reasonable efforts to obtain it”.  I think it reasonable to assume that “all reasonable efforts” is equivalent to “all reasonable endeavours”.

At this stage it may be useful just briefly to refer to some decisions on the application in particular circumstances of the expressions “best”, “reasonable” and “all reasonable” endeavours.

A “best endeavours” obligation is clearly the strongest.  As mentioned above, it is clear from the Jet2.com case that such an obligation may require expenditure on behalf of the obligor.  A best endeavours obligation may also impose an obligation to litigate or appeal against a decision (Malik Co. v Central European Trading Agency Limited [1974] 2 Lloyd’s Rep.279 – though the court also decided in that case that the obligation would not extend to action that was doomed to failure or would be unreasonable in all the circumstances).  In the context of the particular situation envisaged here, if the Standard Conditions of Sale were modified to include a best endeavours obligation then it might well require the assignor to litigate against an unreasonable landlord (stressing again that there would be no such obligation if the case were hopeless).

£10 Building“Reasonable endeavours” is a much woollier concept.  The obligation has been said to involve the obligor balancing “the weight of their contractual obligation” to the other party again “all relevant commercial considerations” such as the obligor’s relations with third parties, its reputation, and the cost of that course of action.  In doing so, “the chances of achieving the desired result would also be of prime importance” (UBH Mechanical Services) Limited v Standard Life Assurance Company, The Times, 13th November 1986) these considerations are to be subjective i.e. based on the circumstances of the obligor; the obligor would not be required under a reasonable endeavours covenant to sacrifice its own commercial interests and it is unlikely that the obligation would extend to the taking of legal action.  Some commentators would disagree with that and say that the obligor would only be excused from taking legal action if the outcome was doubtful, but although it may be going too far to say that a reasonable endeavours obligation would never require legal action I think it would do so only where a successful outcome was virtually guaranteed (and that can never be said of litigation of any kind).

So to the compromise; “all reasonable endeavours”.  The common view is that “all reasonable endeavours” sits somewhere between “best endeavours” and “reasonable endeavours”; in the UBH case the court took the view that an  “all reasonable endeavours” obligation probably creates a middle position somewhere between “best endeavours” and “reasonable endeavours” i.e. implying something more than “reasonable endeavours” but less than “best endeavours”.  However, in the case of P&O Property Holdings Limited v Norwich Union Life Insurance Society [1993] EGCS69; Rhodia, the judge stated, Obiter that;

“an obligation to use reasonable endeavours to achieve the aim probably only requires a party to take one reasonable course, not all of them, whereas an obligation to use best endeavours probably requires a party to take all the reasonable courses he can.  In that context, it may well be that an obligation to use all reasonable endeavours equates with using best endeavours

Is an “all reasonable endeavours” obligation therefore the same as a “best endeavours” obligation?  Commentators differ on this, as the decision in Rhodia could arguably be regarded as limited to the issue of the number of courses of action a party needs to take, and not to the other distinctions between the obligations.  There is subsequent authority supporting that interpretation and the proposition that an obligation to use “all reasonable endeavours” will not always require the obligor to sacrifice its commercial interests; but that is not really the question we are looking at here.  The standard is probably objective and it is hard not to conclude that an “all reasonable endeavours” obligation is incapable of requiring the obligor to enter into litigation.

Coming back to the Standard Conditions of Sale, therefore, it seems to me not unreasonable to conclude that the obligation in Condition 8.3.2 would in appropriate circumstances require the assignor to make an application to the court where there was at least serious doubt whether the landlord’s grounds for refusing consent could reasonably be regarded as unreasonable.

ContractGiven the uncertainties, one solution is to include in a contract which contains endeavours obligations a definition of what efforts are required.  However, this is  difficult to achieve, and it may be simpler to define what is not required.  In the case of complicated commercial contracts this could again be difficult, but in the simple case under consideration here the matter could be dealt with in the Contract for Sale by modifying Condition 8.3.2(a) by adding a proviso “provided that the expression “all reasonable efforts” shall not extend to the seller entering into any form of litigation against the landlord [or to the expenditure by the seller of any sum in excess of £[XX]”.  The limitation on expenditure is thrown in for good measure but it would be difficult to establish the quantum; the key point is to ensure that the assignor is not obliged to litigate.

 

 

 

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