Am I being good enough? Good faith obligations in real estate contracts

It is common to see parties agree to act in "good faith" towards each other throughout the duration of a contract. However, it is often difficult to articulate exactly what that means in a commercial context.

Flagrant breaches of good faith are easy to identify, but also quite rare. In most cases, it is harder to say whether a parties' conduct has crossed the line, and, if so, what the consequences of that should be.

In the following, we look at a recent case where a commercial property agent was found to be in breach of its obligation to act in good faith towards its client, and then consider some general principles that will help parties understand the scope of their own obligations and those with whom they are contracting.

A state of faith

Earlier this year, judgment was handed down in the case of Athena Capital, Raffaele Mincione & Ors v Secretariat of State of the Holy See[1].

It was a remarkable case in that it was the first time an organ of the Vatican State had been sued in England or Wales. It was also notable for its finding of "bad faith" against an agent that had been representing the Holy See in a property deal that went wrong.

The facts of Athena Capital are complex. However, Mr Justice Knowles' assessment of the agent's conduct, and how it amounted to a failure to act in good faith, was clear:

"[he] fell below the standards of communication with the State that could be described as good faith conduct. To state that the value of the Property was £275 million, as Mr Mincione did at the meeting on 20 November 2018, was not frank and was, at least without elaboration, misleading by reference to the sources available to him and in context".

The property in question was eventually sold for £89 million less than the valuation presented to the Holy See.

Mr Justice Knowles went on to say:

"the State had reason to consider itself utterly let down in its experience with the Claimants. The Claimants made no attempt to protect the State from fraudulent bad actors. They took no care towards the State and they put their own interests first".

It is also worth noting, however, that despite their failure to act in good faith, Mr Justice Knowles found that the agent was not necessarily dishonest or fraudulent.

Athena Capital demonstrates that, when the facts justify it, the Court will enforce breaches of an obligation to act in good faith. That said, the circumstances in Athena Capital were extreme, and it is helpful to consider a few other cases to understand how good faith obligations work in practice.

What does good faith *not* require?

To begin with, it is instructive to consider what would generally be considered outside the requirements of the obligation.

First, it does not mean that a party must give up, or act against, its own commercial interests. By way of illustration, in Gold Group Properties Ltd v BDW Trading Ltd[2], it was held that an obligation to act in good faith did not require a party to a development agreement to renegotiate revenue-sharing arrangements to take into account worsening market conditions.

Second, it does not require a party to forgo other contractual rights. In the case of TSG Building Services plc v South Anglia Housing Ltd[3], it was held that a covenant requiring the parties to "work together and individually in the spirit of trust, fairness and mutual co-operation" did not necessarily mean that they had to act in good faith, and that, even if it had, it would not have prevented either party from exercising a contractual right to terminate the agreement.

Therefore, whilst an obligation to act in good faith will mandate certain standards of conduct, its effect is constrained by the wider contractual framework governing the parties' relationship and the freedom to prioritise one's own commercial interests.

What might good faith require?

The exact scope of the obligation will depend on the facts of the case in question. However, the following are some examples of how the Courts have previously interpreted and applied the obligation, and which provide guidance for future cases.

First, the obligation will generally require parties to avoid taking any action that would frustrate the objectives of the contract. In the case of Berkeley Community Villages Ltd v Pullen[4], a promoter had undertaken to arrange planning permission, and then sell a piece of land, in respect of which they were to be paid commission. However, the landowner decided to sell the land, part way through the planning permission process, depriving the promoter of its commission. This was held to be in breach of the landowner's obligation to act in "utmost good faith".

Second, the obligation will usually require full disclosure of relevant material facts. In Horn v Commercial Acceptances[5], a borrower failed to notify the provider of a development loan that it had obtained funding from a third party (rather than put their own money into the deal), and this was held to be in breach of the borrower's duty to act in good faith.

Third, it generally requires parties to progress matters expeditiously and without stalling. By way of obiter remarks, the judge in Glencore Energy UK Ltd v NIS JSC Novi Sad[6] opined that, where parties were required to act in good faith to agree the quantum of a payment, deliberate delay by either party in the negotiation process would have been in breach of good faith.

Fourth, the obligation will likely prevent parties from advancing groundless disputes to try and improve their position under the relevant contract. For example, in the case of, Teesside Gas Transportation Ltd v CATS North Sea Ltd[7] the contract allowed for a reduction in late payment interest, where an invoice was disputed "in good faith". However, the Court held that, where a party knew that there were no substantive grounds for a dispute, it was not acting in good faith to assert that the invoices were disputed.

Faith forwards

The above principles are not exhaustive. The obligation to act in good faith could require parties to take, or refrain from taking, many different types of action. Exactly what the obligation entails will depend on the facts of the specific case in question.

Parties who wish to enforce good faith obligations should take time to consider their position carefully and then develop a reasoned argument as to why they think the other parties' conduct has failed to meet the required standard. Too often, good faith obligations are alleged to have been breached, but without proper thought as to how far the obligation actually goes.

Arguably, the most helpful guidance comes from the cases which describe what good faith does not require a party to do. There is no implied requirement to forgo commercial interests or contractual rights. Accordingly, if a party is otherwise complying with the terms of the contract in question, it is unlikely that they will have failed to act in good faith, apart from in exceptional circumstances. That said, as the recent case of Athena Capital shows, the Courts are not afraid to call out bad faith when they see it.