A recent First-instance Tribunal (FTT) case serves as a litmus test in how tribunals balance the “strict” wording of a contract against the “commercial reality” of property development.

Facts:

The case concerns a dispute over a property previously known as the Beach Hotel, or ‘Mud Club’ in Bognor Regis, which was destroyed by fire in 2016. The applicant holds a long leasehold interest under a headlease from Arun District Council, which notably prohibits residential use and restricts the property to a strictly commercial function, such as a restaurant or nightclub. Before the fire, the respondent operated a fish and chip shop within the building under an underlease.

Following the destruction of the building, the parties settled a legal dispute in 2018 through a consent order that led to a formal option agreement in 2019. This agreement required the applicant to use all reasonable endeavours to reconstruct the building and include a restaurant space, offering the respondent a right of first refusal on a new 20-year protected tenancy.

The conflict arose when the applicant sought to cancel a unilateral notice the respondent had placed on the title to protect his option rights. The applicant argued that the option agreement had been discharged because they were unable to secure the necessary cooperation from the head lessor. While the applicant had successfully obtained planning permission from the local authority for a mixed-use development comprising ten apartments and two commercial units, they claimed that Arun District Council, acting in its capacity as landlord, refused to consent to any reconstruction containing a commercial element. To support this, the applicant relied on witness testimony from its director, Richard Brooks, and various email exchanges with the Council’s estates department.

Decision:

The applicant failed in their attempt to cancel the unilateral notice, meaning the respondent’s legal protection over the property remains in place.

The Judge agreed with the applicant that the 2019 option agreement was incomplete as written, and ruled that it was necessary to include three terms in the contract to make it work commercially. These terms state that the agreement is conditional upon the head lessor’s (Arun DC) consent and that, if the applicant uses “all reasonable endeavours” but still cannot get that consent, then the agreement is automatically discharged (i.e., ended). This was a significant legal victory for the applicant, as it proved that the contract is not necessarily a “life sentence” if the building can never be built. Despite winning the legal argument, the applicant lost the case because they could not prove they had actually reached a dead end. The Judge found that the applicant had only asked the landlord for permission to build a mixed-use development. Because the headlease specifically prohibits residential use, the landlord’s lack of cooperation was predictable. The Judge ruled that the applicant had not used “all reasonable endeavours” because they had not yet sought permission to construct a purely commercial building like the one that originally stood on the site. Because the applicant had not yet exhausted all reasonable paths to gain consent, the “discharge term” was not triggered.

Implications:

This case reaffirms that “all reasonable endeavours” is an exacting standard. To satisfy it, a party cannot simply propose the development it prefers. If there are two ways to fulfil a contract—one that is difficult but legally compliant, and one that is profitable but requires a third party to change the rules—then the party must try the more difficult and compliant alternative first.

The Tribunal clarified that, while an ‘entire agreement’ clause is a “strong factor” against implying terms, it does not prevent a judge from implying a term “in fact” to give the contract business efficacy. No matter how poorly a contract is drafted, the courts will try to find a way to make it “work” in the real world rather than leaving it in an infinite stalemate.