The Court of Appeal has held that a developer breached an obligation to use "reasonable endeavours" to obtain the means to undertake a development project, in order to avoid an overage payment of £1.4 million. The Court found that the developer had manipulated the factual circumstances to delay the trigger date for the overage payment until four days after the longstop date. In doing so, it had failed to use "reasonable endeavours" to take the necessary steps "as soon as reasonably practicable".
Although the longstop date had passed, damages for breach of contract were assessed at £1.4 million. The case therefore provides a cautionary tale to those seeking to escape overage payments, as well as a useful analysis of the applicable law concerning obligations to use "reasonable endeavours".
In 2003, Abbeygate Helical (Leisure Plaza) Ltd (Abbeygate) acquired the tenant's interest in an ice rink and loading bay at Leisure Plaza, Milton Keynes (the Premises) for £1.525 million, in order to facilitate a wider redevelopment project. As part of the arrangements, Abbeygate also agreed to pay overage to the seller in the sum of £1.4 million, in the event that:
These conditions were subject to an obligation for Abbeygate to "…use its reasonable endeavours… …as soon as reasonably practicable…" . There was also a longstop provision which provided that the obligation to pay overage would fall away if it had not been triggered within 10 years (ie before 4 July 2013).
Having acquired the leases of the Premises and various other interests, little progress was made with the redevelopment for a number of years. Planning permission was granted in 2007 and a further permission was granted in 2010, but these were not implemented and in 2011, the benefit of the overage agreement was assigned to the claimant, Gaia Ventures Ltd (Gaia) for £200,000.
A further planning permission for a revised scheme was granted in 2013, shortly before the 10 year longstop date. By this time, Abbeygate had also entered into complex arrangements to finance the development and obtain an anchor letting to Morrisons.
The terms of these arrangements enabled Abbeygate to manipulate when it would satisfy the condition in the overage agreement to obtain clear title for the site. This flexibility would enable Abbeygate to achieve continuity of financing. Perhaps unsurprisingly, it transpired that the overage condition was not satisfied before the longstop date and Abbeygate therefore contended that it did not need to pay the overage sum.
The Court noted that "reasonable endeavours" is a common phrase used in English contracts to qualify an obligation. Its interpretation requires a Judge to make a value judgement in the light of all of the facts of the case, so precedents are not always helpful and the rules of contractual interpretation must be applied.
The duty is not a promise to actually do something, but merely a promise to take a reasonable course of action to achieve that aim. It is considered to be less onerous than an obligation to use "best endeavours" and it is thought that an obligor is not required to sacrifice its own commercial interests in order to comply.
As well as various issues concerning the correct construction of the terms of the overage agreement, the key issue for the Court to consider was whether Abbeygate had used "reasonable endeavours" to satisfy the overage conditions "as soon as reasonably practicable".
The Judge at first instance had found that the timetable for the transaction was largely motivated by a desire to avoid the overage payment, so the key question on appeal was whether the delays could be justified for other acceptable reasons.
The Court of Appeal held that although Abbeygate's actions were ostensibly dictated by its legitimate concern to fund the project, it was also clear that Abbeygate was aware that this could result in an added bonus of avoiding the overage payment to Gaia. The Court did not accept Abbeygate's submission that it would have been at risk of committing itself to a development it could not fund by moving faster, as this was not the reality of the situation.
On the contrary, Abbeygate had been able to manipulate the timeframes to ensure that the overage payment would have become payable just four days after the longstop date. While no one could say for certain whether Abbeygate could have complied with the overage conditions earlier, its failure to use reasonable endeavours meant that this was a problem of Abbeygate's making.
Overage provisions are often contentious and it is not uncommon for those burdened by them to seek a way out of paying. Careful drafting is therefore essential, particularly in circumstances were the burdened party retains control of the actions that will trigger the payment.
Practically speaking, one should also give due consideration to the "optics" involved. In this case, the developer found a way to comply with the conditions just four days after a 10 year longstop date, so it is perhaps unsurprising that its evidence was hard for the Court to accept.