During negotiations for a development agreement, a developer entered into two lock-out (or "exclusivity") agreements with English Partnerships. The first ran from 26 October 2004 until 21 December 2004 and the second ran from 21 December 2004 until 21 April 2005.

The lock-out agreements provided that English Partnerships would not, during the period of each agreement, "invite tenders for or enter into negotiations for the sale, development letting or charging of the Property" or "allow any person to view, measure, survey or carry out site investigations on the Property". The agreements also provided that the developer and English Partnerships "each owed the other a duty of good faith".

The developer had difficulties in obtaining funding, and the second lock-out agreement expired. English Partnerships continued to deal with the developer, but it laid down target dates by which the developer had to exchange the development agreement and start work on site. Unfortunately the developer's partner in the deal pulled out on 12 July 2005. This caused English Partnerships to terminate negotiations on 15 July.

The developer claimed that, in breach of the lock out provisions, English Partnerships had negotiated with, and entertained a tender from, a third party. In addition, the developer claimed English Partnerships had gone through the motions of negotiating and let the developer incur considerable expense, when in reality English Partnerships had no intention of entering any agreement with the developer. The developer argued that consequently English Partnerships had not acted in good faith.

The court found on the facts that English Partnerships had negotiated with the developer in good faith. Provided the developer could meet its requirements, English Partnerships was willing to enter a development agreement. Against the background of the protracted period of time over which negotiations had been conducted, and the various sources of finance courted by the developer over that period, it was perfectly proper for English Partnerships to say that, if the partnership with the developer's then partner failed, the negotiations would be terminated.

The court also found that English Partnerships did not deal with any other party in respect of the land until after the negotiations with the developer had been terminated.

As such, there had been no breaches of the two lock-out agreements. There was no bar to English Partnerships terminating negotiations as it did.

Things to consider

Some continental jurisdictions have the concept of a duty to carry on negotiations in good faith, but this is not generally recognised by English law. It is seen as being contrary to the right of a party to withdraw from negotiations at any time and for any reason, and is considered too uncertain to be enforceable. However, there have been several cases in the last year where a duty to act in good faith (as opposed to a duty to negotiate in good faith) has been in issue. The exact scope of such a duty will depend on the facts of each case and the context in which it arises.

In this case, the allegation that English Partnerships had not acted in good faith was because the developer believed that the negotiations were a sham. It argued that English Partnerships never had any intention of giving the project to the developer. The court found that allegation to be unfounded. On that basis, there was no need to examine the scope of the duty to act in good faith in any more depth.

Chilli Developments Ltd v Commission of the New Towns