Reasonable endeavours: when a lack of funding is no excuse - Quick reads - Gateley
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Reasonable endeavours: when a lack of funding is no excuse

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Reasonable endeavours obligations appear in many land acquisition agreements, particularly those containing overage provisions.

An overage payment is nearly always triggered by the purchaser achieving something, most commonly the granting of an acceptable or satisfactory planning permission. Coupled with this will be an obligation for the purchaser to use its "reasonable endeavours" to achieve what it needs to achieve by a certain date (a long-stop date).

Defining ‘reasonable endeavours’

The phrase “reasonable endeavours” is one of those phrases beloved of lawyers, the meaning of which is very hard to pin down. Given this, and the high value of many overage payments, it is not surprising that over the years there have been many cases involving the meaning of "reasonable endeavours". 

Those cases have established parameters for the meaning of “reasonable endeavours”, which include the following:

  1. Reasonable endeavours means that a party only has to take one reasonable course (n.b. an obligation to use “best endeavours”, which is higher up the "endeavours” tree than “reasonable endeavours”, would mean taking all reasonable courses of action);  
  2. Using reasonable endeavours means doing what is feasible and reasonable in all the circumstances, balancing the risk involved against the obligation to use reasonable endeavours; and
  3. Something which merely affects the margin of a purchaser’s profit would not normally be taken into account in considering whether it is reasonably practical for a developer to continue with a course of action.

But what happens if a purchaser cannot get funding, or cannot get funding in time, to proceed with the development and therefore trigger the overage? Will this get the purchaser off the hook in respect of its reasonable endeavours obligation? A recent Court of Appeal decision has shown that, in certain circumstances, it won’t.

What did the case involve?

The case involved an overage payment that was triggered when the purchaser obtained an acceptable planning permission. However, payment of the overage was also conditional upon the purchaser obtaining clean title for the overall site, which meant acquiring various head leases and sub leases. The purchaser was under an obligation to use reasonable endeavours to achieve those ends.

The purchaser structured the overall deal for the site so that it would not have to take on any liabilities (including the leases) until it had obtained funding from its funder. Interestingly, the Court of Appeal described this as the purchaser “manipulating” the various elements of the deal.

The problem was that the purchaser could not obtain the funding before the long stop date. The purchaser therefore argued that it had used its reasonable endeavours to obtain clean title to the site before the long stop date, but was prevented from doing so by the fact that it had not yet obtained funding. Accordingly, it didn’t have to pay the £1.4 million overage payment.

The Court’s decision

The Court of Appeal did not accept the purchaser's argument. Whilst funding issues may, in the right circumstances, be taken into account in deciding whether a party has used its reasonable endeavours, in these circumstances it would not.

This was because the funding arrangements, and in particular the timing of the funding, were of the purchaser's own making. In addition - and perhaps more tellingly - the Court suspected that the purchaser had set up the whole structure of the deal with the aim of running past the overage long stop date.

In conclusion

This case suggests that an ability to obtain funding will not be taken into account by the Courts when assessing whether a party has used 'reasonable endeavours'. But this is not what it actually says. This case was more about the purchaser's inability to obtain funding by a certain date, rather than an inability to obtain funding at all. It is likely that the latter will still be taken into account by the Courts when assessing whether a purchaser has used its reasonable endeavours, whereas the former will not, particularly when the timing issue is of the purchaser’s own making.

It is clear from the judgement that the Court reached its conclusion because it had strong suspicions (even though it had no direct evidence) that the whole deal had been set up so that it would “run-down” the overage clock. The lesson for purchasers is therefore clear - do not try and structure a deal so as to try and avoid paying overage, because the Courts will not be sympathetic to such an approach.

Points to consider

It is important to remember that ‘reasonable endeavours’ is the least onerous of the 'endeavours’ obligations. If the obligation was to use ‘all reasonable endeavours’, or ‘best endeavours’, the Court would be even more reluctant to take the availability of funding into account.

References

Rhodia International Holdings Limited –v- Huntsman [2007] EWHC 292 

Alghussein Establishment –v- Eton College (CA) – Times, 16 February 1987

Gaia Ventures Limited –v- Abbeygate Helical (Leisure Plaza) Limited (2018) EWCA Civ 823

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