Does failure to obtain development finance constitute a failure to use “reasonable endeavours” to deliver a project?

United Kingdom

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.

Funding is not currently the easiest thing to obtain and the recent High Court case of Ampurius NU Homes Holdings Ltd v Telford Homes (Creekside) Ltd may make chilling reading for many developers. In this case Mr Justice Roth was of the opinion that a developer failed to comply with its reasonable endeavours obligation to procure the completion of certain works by a target date, where delay was due to lack of funds. Although the facts in each case will influence the interpretation of the scope of a “reasonable endeavours” obligation, this could go on to become precedent.  
Under the terms of the contract Telford were to use “its reasonable endeavours to procure completion” of 4 mixed-use blocks at the borders of Greenwich and Deptford. The development was to be financed by RBS in 2 tranches under terms agreed in pre-Lehman 2008. The Phase I funding was made available for the construction of the underground car park and podiums for all 4 blocks and the finishing of 2 of the blocks. The Phase II funding was to be made available to finance the construction of the remaining 2 blocks above podium level.  The Phase II funding was conditional upon 85 of the 371 flats being pre-sold.. Only 4 flats were pre-sold following the “credit crunch” and so the Phase II funding was not released. Works on 2 out of the 4 blocks therefore stopped in June 2009.  
In July 2010 Telford’s solicitors wrote to Ampurius’ solicitors that :

“Your clients….are fully aware of the financial difficulties of the last 2 years.  These difficulties have been demonstrated by the lack of development finance and the considerable slow down in the sales of new homes. ”

Whilst the case did not concern whether Telford had used its “reasonable endeavours”, Mr Justice Roth stated, in obiter, that a “reasonable endeavours clause” as regards the time of completion in a construction contract can not extend to endeavours to obtain financing.  His view was that such an obligation in a construction contract is designed to cover such matters that directly relate to the physical conduct of the works, thereby providing for an excuse for delay in such circumstances as inclement weather or shortage of materials. It did not extend to matters “antecedent or extraneous” to the carrying out of works such as the availability of finance.

Though this is obiter perhaps from now on obtaining finance will form a limb of the market accepted definition of “delaying factor”?