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Good Faith Clauses in Development Agreements

on Tuesday, 24 May 2016.

Development agreements frequently contain a clause to act with 'good faith'. It is often difficult, however, to ascertain the meaning of 'good faith' and the obligations and duties imposed on the contracting parties.

What is a 'good faith' clause?

Whilst there is no general principal of 'good faith' in English contract law, the courts have recognised that a duty of good faith will usually require a party to:

  • adhere to the overall spirit of the contract
  • observe reasonable commercial standards of fair dealing
  • be faithful to the agreed common purposes
  • act consistently with the justified expectations of the parties

What effect can a good faith clause have on a development agreement?

By its very nature, the duty of good faith is subjective and its application will be dependent on the facts and circumstances of the contract.

The cases below demonstrate the varying approaches taken by the courts in interpreting the duty of good faith in the context of development agreements:

  • Berkeley Community Villages Ltd v Pullen [2007]

A landowner and developer entered into an agreement, in which the developer endeavoured to promote the development of the land and act for a profit of 10% of the net returns upon sale of the land, after the relevant planning permissions were obtained.

The developer (having invested in enhancing the value of the land) applied to the court to prevent the sale of the land by the landowner prior to planning permission being obtained.

The court held that the clause created a general obligation to act with the 'utmost good faith' and considered that the landowner's intended sale to a third party (prior to planning permission being obtained by the developer) would amount to a breach of the landowner’s obligation of good faith.

  • CPC Group Ltd v Qatari Diar Real Estate Investment Co [2010]

The parties entered into an agreement to acquire and develop Chelsea Barracks. CPC claimed that the subsequent withdrawal of the application for planning permission was a breach of an express good faith clause.

The court held that the duty of good faith had not been breached, because withdrawal of the planning application was “not motivated by ill-will or bad faith.”

  • Gold Group Properties Limited v BDW Trading Limited [2010]

The developer entered into an agreement for the development of residential dwellings.  Prior to the commencement of construction, the property market crashed. The developer argued that the landowner was under a duty (based on good faith) to renegotiate profit sharing arrangements, once the impact of the decline of the property market became apparent.

The court concluded that the landowner was not in breach of the good faith clause by reason of its failure to renegotiate accordingly.

Conclusion

Contracting parties should not overlook the significance of a good faith clause when making decisions concerning the development agreement.

Unlike the majority of the clauses in a development contract, the interpretation of a good faith clause is subjective and has led to considerable time, effort and money in litigating what is meant by the clause.

Contracting parties should not rely on a good faith clause as a mechanism to enforce a legal obligation to carry out a particular act. If there is some condition that a party believes is vital to the contractual relationship, then this should be clearly drafted in the development agreement.

If you require advice on the interpretation of a good faith clause or the drafting of a development agreement, please contact Jessica Booz in our Commercial Property Law Team on 0117 314 5483.