Good faith: land collaboration and land promotion agreements

Land collaboration agreements and land promotion agreements are long term arrangements and, as with any long term arrangement, the parties to it might need to work together over an extended period of time.  This post looks at duties of good faith in such agreements, whether they are worth the paper they are written on and when a court might imply such duties.

What are land collaboration and land promotion agreements?

In the context of development, a land collaboration agreement is an agreement between neighbouring landowners who wish to jointly apply for planning consent to develop their parcels with a view to selling the parcels to a single developer.  A land promotion agreement is an agreement between a developer or promoter on the one hand and a landowner (or several landowners) on the other.  Under a promotion agreement the developer or promoter will look to obtain planning permission for the site with a view to either selling it with the benefit of planning consent or purchasing it.  In the case of either type of agreement the parties will need to work together in order achieve their agreed common objectives but priorities and objectives can change over the duration of such arrangements.  At first glance it might be considered to be preferable for there to be express provisions dealing with good faith but the inclusion of such express terms can be problematic.

Should a duty of good faith be expressly provided for in such agreements?

The difficulty with an express duty of good faith is that you have to define what is meant by good faith.  There is no set definition of what good faith is.  What might be needed to be seen to act in good faith under Contract A may be different to what might be needed under Contract B.  This is because all commercial contracts are different.

The lack of a legal definition of good faith means that if the parties wish to contain express obligations they will have to define what good faith means in the context of their contract.  This seems fine in principle but when you scratch under the surface it can give rise to a risk of unintended consequences arising.  First, it is imperative for the wording to provide certainty when it comes to the application of the duty across all of the operative provisions of an agreement.  Just like the scope of a good faith duty may differ from contract to contract, the scope of the duty may change depending on which provision of an agreement you are looking at: What is expected in order to demonstrate good faith may differ at a pre-planning application stage compared to a post-planning application stage or at the point at which planning consent has been obtained and the land is to be sold.  The more sophisticated your drafting, the more unwieldy it may become.  Second, if the parties provide for an express duty of good faith, a court will presume that the wording of the agreement represents the full extent of the parties’ agreed good faith obligations and will be highly unlikely to imply any revision or extension to that duty.  Third, it has been held that a duty of good faith can in certain cases import a duty of disclosure, which could include disclosure of information that is commercially sensitive.

There are certainly risks associated with seeking to draft an express duty of good faith though this is not to say it is unwise to ever include such obligations.  The nature of the arrangement between the parties may make it relatively straightforward to define the scope of such a duty.

What about implied terms?

As a general rule the court does not imply a duty of good faith into contracts, however, that is not an absolute position and where a contract is “relational” then the courts are willing to imply such a duty or at the very least import a sense of good faith and mutuality when interpreting the scope of obligations under such a relational agreement.  This however leads to a question of what a relational contract is.  Unhelpfully there is again no set definition but there are a number of factors which point to a relational contract being in existence, all of which were considered in detail in the Post Office litigation (which pre-dated the public enquiry) in relation to the Horizon accounting system failure.  These factors include:

• The duration of the relationship;
• The commitment to collaboration and co-operation during the currency of the relationship;
• The level of investment made by the parties under the agreement; and
• The exclusive nature of the relationship.

Looking at these factors it would seem likely that most collaboration and land promotion agreements would fall within the scope of relational contracts and could therefore be subject to an implied duty of good faith.  Such agreements are a form of joint venture under which the parties intend to have a long term collaborative relationship, requiring both co-operation and commitment to achieve the common goal, and when considered in that light it can be seen why a court would be willing to imply duty of good faith.

A willingness to imply a duty of good faith does lead to a second question which is: what is the scope of the duty?  As to that, the approach of the court will be to look at the detail of the obligations, duties and aims as recorded.  What this means is that, if seeking to rely upon an implied duty, the parties to a collaboration or land promotion agreement need to ensure the drafting is comprehensive in identifying the substance, aims and objectives of the agreement as well as the scope of obligations and duties on the parties.  It is this substance which will enable a court, in cases where the relationship has broken down, to establish the scope of the good faith duty which is to be implied (if any) in order to achieve those aims and objectives.

Conclusions on the duty of good faith

While it may be possible (and parties might be willing) to define express duties of good faith there is a risk of unintended consequences in doing so.  Certainly the parties to an agreement should be careful to ensure that an express duty of good faith includes clarity over what is required to discharge it.  In most cases of collaboration and promotion agreements it seems likely a court will, in the absence of an express duty, be willing to imply one.  If parties are not intending to include express duties of good faith, it would seem preferable for them to being as comprehensive as they can in identifying in clear terms the substance, aims and objectives of the agreement in order that, in the event the relationship between the parties breaks down and good faith is a live issue in dispute, a court has all of the tools at its disposal in order to determine whether such a duty should be implied and, if so, its scope.

How we can help

If you would like advice on any of the issues raised in this article, please get in touch with our property dispute resolution team.