What are "reasonable endeavours" in contracts conditional on obtaining planning permission?

1. Introduction

The recent High Court judgment in Romal Capital (C02) Limited ("Romal") v Peel Ports Limited ("Peel") is a rare case in which the courts considered the extent of "reasonable endeavours" obligations to assist in obtaining planning permission, in the context of contracts conditional on obtaining such permission. This decision reinforces an actively merits-based approach by the courts to the interpretation of such agreements, which are often (deliberately) drafted in a mechanistic way with a view to protecting one side or the other.

The decision also considers how to assess damages where such obligations have been breached by assessing the "loss of opportunity" (in this case, to obtain planning permission for a larger scheme) as the result of the breach of those obligations.

In this note, we set out some of the court's main findings from what was an extensive 137-page judgment.

2. The Claim

Romal claimed damages against Peel for breach of an agreement for a lease ("AfL") relating to part of Central Docks, Liverpool immediately adjoining West Waterloo Dock (the "Land").

Peel has a long leasehold interest in a substantial part of the docklands north area of Liverpool City Centre, for which the City Council granted an outline-planning permission for extensive redevelopment over a period of up to 30 years in 2013. The area of docklands is known as Liverpool Waters.

Romal claimed that Peel had breached various obligations in the AfL which obliged Peel (in broad terms) to approve and assist Romal to pursue—and to support—an application for planning permission for a development of more than 600 residential units on the Land. Romal alleged that, if Peel had performed its obligations, it would have had a substantial chance of obtaining planning permission for a much more valuable development than the 330 unit development for which it actually obtained planning permission, and consequently Romal had suffered a significant loss.

Romal contended that there was an 80% chance of obtaining a more valuable planning permission, and the amount claimed by Romal for the breach was in the region of £12 million. That represented 80% of the difference between the expected net profits of the 330-unit development and the expected net profits that would have been made if planning permission for a development of 646 residential units had been granted. Peel denied that there was any obligation on it to assist and support Romal in seeking planning permission for a larger development, and asserted that all of Romal's losses were caused by its own failures to comply with the requirements of the AfL, including the requirements to:

• Carry out due diligence on the development opportunities;
• Obtain Peel's consent to the initial designs for the proposed development; and
• Obtain approval for the scheme for which a planning application was submitted.

By breaching these requirements, the planning application that was submitted by Romal fell outside of the scope of the AfL, and Peel was consequently under no obligation to use "reasonable endeavours" to support the application.

Peel further argued that even if it was in breach of an obligation in the AfL, that breach had caused no loss to Romal. This causation argument was advanced on the basis that even if Peel had fully performed its obligations, there was no real and substantial chance of obtaining planning permission for a larger development than the 330-unit development for which planning permission was granted.

3. The Judgment

3.1 Waiver and estoppel

Fancourt J. emphatically rejected all of Peel's arguments. He held that the application was made pursuant to the AfL despite the fact that Romal had failed to comply with some of the procedural requirements in the AfL, which had been waived by Peel on the facts. Or if that were wrong, then Peel was estopped from relying on the procedural requirements because:

• Peel had led Romal to believe it was pursuing a planning application with Peel's agreement; and
• Romal had relied on that at considerable cost which it would not have incurred only to obtain a planning permission which would benefit Peel (as Romal would only obtain land rights under the AfL if it obtained a satisfactory planning permission under that agreement).

In essence, in the judge's opinion, both parties proceeded on the assumed basis that the application fell within the four corners of the AfL. The judge was scathing about Peel's argument that the procedural requirements "created a sequence of promissory conditions which Romal had to surmount one by one in strict compliance with their terms failing which [it] loses its rights under the AfL". He described this as "an exercise of retrospective wishful-thinking."

Although much of the case turned on its particular facts, it is interesting to note that the judge looked behind the correspondence to see how the parties had behaved. For example, when it came to the requirement on Romal to obtain Peel's consent to the planning application, Peel said:

"As the proposed residential application will be submitted without resolution on these key [design] issues, the decision [to submit the application] will be entirely at your own risk". (Emphasis added.)

The judge took the view that, despite the apparently clear highlighted text, this was approval under the AfL, but approval conditional on Peel having the opportunity to make comments on detailed design issues during period for consultation on the application.

The judge noted that, despite this reservation, Peel (amongst other things) attended a public presentation to local residents on the application, went to MIPIM advocating Romal's proposed development and attended a meeting with Council officers at which it acknowledged that a reduction in the size and density of the scheme would result in a lower payment to it "on consent" being granted – such payment being due under the AfL. In other words, in the judge's view, "both parties mutually proceeded on the assumption that the … application was [made under the AfL]" and Romal relied on this to its significant detriment (in terms of the costs of pursuing the application).

3.2 "Reasonable endeavours" obligation

Peel was held to be in breach of its reasonable endeavours obligations in the AfL in many respects. It did not assist Romal to obtain planning permission, as it should have done under the AfL, and it did not support Romal's planning application at all. Instead, it: failed (in breach of express requirements in the AfL) to integrate its designs for its neighbouring land with Romal's; pursued amendments to a pre-existing outline planning permission for a wider area—including the Land—which were likely to be of benefit to Peel in bringing forward other developments on its property, but which made it very difficult for Romal to obtain planning permission for its development of the Land; and withheld critical information about its own masterplan changes which would adversely impact Romal's development. The judge also noted that Peel had prioritised its own relationship with Council officers ahead of its relationship with Romal.

3.3 Loss of opportunity

These breaches of contract caused Romal to lose a real and substantial chance of obtaining planning permission for the 600-unit plus development. Peel's argument that there was no realistic chance of the City Council's planning committee or a planning inspector granting planning permission for a larger development was rejected. The final amount of the damages was not assessed, but it is worth noting that, despite the difficulties with assessing the prospects of success of Romal's application in terms of the extremely complex planning history of the site, changing planning policy as well as significant heritage constraints, the court did conclude in Romal's favour that there was a 60% chance of Romal obtaining planning permission for the 600-unit development, either from the City Council or from a planning inspector on appeal.

Had that planning permission been obtained, Romal would have proceeded with the 600-unit development and made greater profits. Romal would also have been able to sell the majority of the underleases of residential units in that development reserving a ground rent of 0.1% of the premium paid for the underlease. Romal therefore also lost 60% of the capital value of the ground rents that it would have obtained. A final determination of losses was deferred in the judgment.

Conclusion

There may well have been an assumption in landlord quarters when entering contracts conditional on obtaining planning permission which include (as they typically do) several procedural hurdles (such as requiring prior written consent to the application, submitting it in joint names, obligations on the tenant to carry out its own due diligence) that non-compliance with these requirements would automatically oust any rights of the tenant to support for their application—especially where such non-compliance was more than de minimis (as here) or was subject to an explicit written reservation of rights. This case shows that that will not be the case where the surrounding factual matrix demonstrates that the landlord was acting as if the conditional contract were in force and the tenant, in relying on that behaviour, went to great expense over a sustained period of time pursuing an application.

This may be thought of as the "right" result, but it does mean that in assessing rights and obligations under a contract such as this, a much wider analysis of the behaviour of the parties and their agents will be required before any firm conclusions can be reached about whether a claim will be successful. 

Secondly, it is interesting to note that the court was content to get into a detailed analysis of the prospects of the planning application here—despite the extremely complex planning policy background—in order to determine whether the tenant had a substantial prospect of obtaining planning permission which was removed because of the contractual breaches of the landlord.