This article was originally published in Blakes Bulletin on Real Estate & Mortgage Financing - March 2005
In an area of the law that commands as much attention to detail as real estate, some may be surprised that such seemingly amorphous concepts as "best efforts" and "acting reasonably" play such an important role in real estate agreements. Key obligations are commonly phrased in the context of a party using its "commercially reasonable efforts" or "best efforts" to secure an approval or complete an undertaking. Courts have had an opportunity to examine many real estate "buzzwords." While their interpretation often depends on the particular facts and context of a transaction, their analysis is helpful in explaining the extent of these obligations.
Courts have determined that, for an action to be "reasonable", there must be a rational basis for the action and the action must not be based on irrelevant considerations. A "reasonable" action is also one that is "sensible or justifiable". "Reasonable" is an objective standard. To determine whether a party is acting reasonably, the party’s actions will be compared to other reasonable and prudent persons in a similar position. Courts have also emphasized that "reasonable" depends on the context and the time when the agreement was concluded.
Commercially Reasonable Efforts
A court will usually decide what is "commercially reasonable" from expert evidence on industry practices. If a party’s obligations are conditional on using its "reasonable commercial efforts" to obtain a required approval from a third party, that party cannot withdraw from the transaction simply because it doubts whether the third party would approve.
This standard is higher than that of "commercially reasonable efforts". Courts have interpreted this phrase as "taking, in good faith, all reasonable steps to achieve the objective, carrying the process to its logical conclusion, and leaving ‘no stone unturned’." The term has also been defined as the duty "to choose, from among the possible and reasonable courses of action, that one which had the greatest chance of achieving the contracted result." This means that if a party has five options from which to choose, it must choose not only a "reasonable" option, but one that has the best chance of achieving the result that it promised. Like the term "reasonable", "best efforts" is an objective standard.
A requirement to use one’s "best efforts" has limits, however. The phrase should be interpreted according to the purpose of the agreement and the circumstances of the parties. Also, parties are entitled to consider their own economic self-interest.
An example of where best efforts may be required, although not explicitly stated, is when an agreement of purchase and sale is subject to a condition precedent requiring approval of a third party. For example, if an agreement is conditional on the purchaser obtaining financing, courts will imply a duty on the purchaser to use its best efforts to do so.
Consent not to be Unreasonably Withheld
This phrase is commonly found in leases in which the tenant promises not to assign the lease without the landlord’s consent, such consent not to be unreasonably withheld. Many provinces, including Ontario, have legislation that implies (in the absence of language to the contrary in the lease) such a provision into every lease containing a covenant against assignment. Furthermore, this phrase requires that the landlord have fair, solid and substantial reasons to object. The burden is on the tenant to show that the landlord is withholding consent unreasonably. Some situations in which a landlord is acting reasonably in withholding its consent include those where the proposed assignment:
would depreciate the value of the property in the future;,
would result in a competing tenant occupying the premises;
would result in a tenant’s breaching a covenant to use the premises for a certain purpose; or
would have a negative effect (according to the landlord’s honest belief) on the property, for example, resulting in a change of use from a department store to a clearance outlet.
The Bottom Line
Although many buzzwords such as "best efforts", "commercially reasonable efforts" and "acting reasonably" all sound similar, the old adage "choose your words carefully" should be firmly applied with respect to real estate agreements, since use of the proper phrase will ensure that the obligation imposed is what the parties expect.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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