Positive obligations in property contracts


07 April 2020

What is the nature of positive obligations in contracts? The context in which positive obligations arise and the way they are documented are both factors which need to be considered before committing to new obligations or to meeting inherited obligations.

You may be required to discuss these obligations at heads of terms stage or the outset of a project before you have had an opportunity to take professional advice. Once agreed in heads of terms it can be difficult to back out of or step back from the obligations. We look at this from the point of view of those obliged to meet the obligations however, all the issues should also be considered by those imposing the obligations since an obligation is of little value if it is unlikely to be performed.

Type of obligation

A positive obligation will arise when an action needs to be taken. This should not be confused with a permission or right. The action may be the payment of money or the performance of a task such as the supply of a document or notice, completion of a document or the carrying out of construction works. The obligation may be recorded as an undertaking, a contractual obligation or a covenant in a title deed or lease. The obligation may be absolute and require the carrying out of an action or procuring an action from a third party. Alternatively the level of commitment may be reduced to using best, all reasonable endeavours or reasonable endeavours to carry out/procure the carrying out of an action. Reasonable endeavours implies that some action is taken to achieve the goal whereas best or all reasonable endeavours also require the payment of monies to achieve the goal.

Factors which may impact upon your ability to perform

Precision, control and timing are relevant to all obligations. A short term one off personal obligation may produce different factors to a permanent routine obligation. 

Is the obligation sufficiently well defined that you are aware of what actions you are required to take? Is there any risk of dispute caused by uncertainty over this? This is particularly important where the action is a precondition. 

Do you require any input form a third party to comply with the obligation? Do you have a contract with the third party which mirrors the nature of the obligation imposed on you with delivery at an earlier date? 

Can you agree a target date with a longer “longstop date” at which time the obligation must be performed? Will there be any extensions to take account of delays caused by a third party or other matters outside your reasonable control?

An undertaking will be provided by your solicitor who will need to be put in a position to perform the obligation prior to giving the undertaking. This is most suitable for the supply or completion of documents or the payment of monies which have previously been quantified and are not in dispute.

Consequences of breach

The consequences of non-performance can range from delay, financial penalties and claims to the loss of an opportunity or all of the above. 

A claim for damages may be made for a breach of contract or a covenant in a title document. You would also need to factor in the delay and cost of dealing with legal proceedings or reaching a settlement. The document may contain an indemnity clause which extends beyond the sums recoverable in a simple claim for breach of contract or covenant. The document may set out specific penalties where e.g. construction works have not been carried out within the agreed timescales. 

The loss of an opportunity may arise where there is an inability to complete a transaction or to open for business within your preferred timescale. A simple obligation to serve a notice correctly may cause the loss of a break right in a lease if it is technically deficient.

Other ways to deal with an issue

There are a number of methods to avoid delay. For example, if you inherit obligations by purchasing land or taking an assignment of a lease and there is an ongoing breach which you cannot remedy, you may consider title indemnity insurance. You may negotiate a release of an obligation although this is less common and may invalidate an indemnity insurance policy. You may assess that the obligation has no commercial value to the other party and invite them to take a view about a breach/potential breach. 

If an obligation must be performed before you can complete a transaction, you may gain commitment through a conditional contract. If the matter is significant but not a pre-condition to completion, you may be required to allow a retention of funds by the other party until you have complied with the obligation as evidence of your commitment.

Conclusion

Ensuring that you don’t over-commit or lose opportunities requires careful thought and analysis. Early engagement with your surveyor and solicitor when agreeing a set of Heads of Agreement can pay dividends in avoiding unpleasant consequences and setting realistic expectations. 

The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at April 2020.