By: Sonja K. Homenuck and Michael Toshakovski1
Introduction
Parties negotiating a lease often negotiate the standard that must be met when fulfilling their contractual obligations. But what does it mean to use "commercially reasonable efforts" or "reasonable efforts" or "best efforts" and the like? Exactly what these competing standards entail is often a source of confusion for both the parties and their lawyers. Further complicating the matter is the question of when a party to a contract is entitled to reduce or stop making the required efforts. This article will report on a recent case that discusses both the level and duration of effort required.
Diamond Robinson Building Ltd. v. Conn
Although sometimes viewed as mere semantics, courts have drawn a real distinction between what qualifies as a "best" versus a "reasonable" effort. Diamond Robinson Building Ltd. v. Conn, 2010 BCSC 76 (CanLII) ("Diamond"), a recent decision from the Supreme Court of British Columbia, reminds both commercial landlords and tenants alike that taking this distinction too lightly could result in unintended adverse consequences.
(a) Facts
In Diamond, the plaintiff landlord brought an action against a commercial tenant for damages arising from the tenant's alleged breach of the lease between the two parties. The lease provided that the landlord agreed to make available to the tenant "up to" 22 reserved parking stalls in the landlord's parking garage to accommodate the tenant's customers. In order to provide the parking stalls, the landlord needed the approval of the strata council to make alterations to the parking garage. In a rider to the lease, the landlord agreed to use its "best efforts" to obtain the necessary approvals from the strata council.
The landlord made a number of unsuccessful efforts over a period of several months to secure the strata council's approval, including meeting with security consultants and contemplating the installation of an intercom system. On September 11, 2006, roughly one and a half months before the commencement of the lease, the tenant informed the landlord that it no longer wanted to proceed with the lease because of the lack of adequate parking. The landlord treated the lease at an end as of this date and immediately stopped pursuing the council's approval. However, it did not send formal notice of acceptance of the tenant's repudiation of the lease. On December 15, 2006, the landlord sent a Notice of Termination to the tenant for defaulting under the lease for failing to pay its rent, purporting to terminate the lease at that time.
(b) The Meaning of "Best Efforts"
Relying on Dorgan J.'s decision in Atmospheric Diving Systems Inc. v. International Hard Suits Inc., [1994] 5 W.W.R. 719 ("Atmospheric"), the court summarized the basic legal meaning of "best efforts" as:
1. Imposing a higher obligation than a "reasonable effort".
2. Not only exhausting all reasonable steps to satisfy a contractual obligation, but also carrying the process to its logical conclusion by "leaving no stone unturned".
3. Doing everything known to be usual, necessary, and proper to achieve the objective.2
A party contracting to use its "best efforts" therefore faces an onerous burden because courts interpret this language as meaning that the party intended to go beyond reasonable efforts to achieve a particular objective. According to the court, a party agreeing to use its "best efforts" is implicitly signalling to the other side that it will leave no stone unturned in attempting to fulfil its contractual obligations.3
Although "best efforts" imposes an onerous burden, it is not an insurmountable one. The court in Atmospheric noted that exactly what constitutes a party's best efforts is context specific and must be "approached in the light of the particular contract, the parties to it and the contract's overall purpose as reflected in its language."4 In addition, it is not necessary for a party to have acted in bad faith in order for a court to find that it failed to use its best efforts to achieve a particular objective. Accordingly, even a party acting with the utmost good faith could be found to have fallen below the best efforts standard.
(c) The Landlord's Continuing Obligations
The court held that the landlord was undertaking its best efforts to secure the strata council's approval of the parking stalls until September 11, 2006 at which point it ceased making any efforts because the tenant had informed the landlord that it was no longer proceeding with the lease. However, the court also found that the landlord did not disaffirm the lease until December 15, 2006 when it delivered its Notice of Termination to the tenant.
At common law, an innocent party must continue to perform its obligations under a contract until it communicates its acceptance of the other party's repudiation of the contract. In this case, the landlord stopped making its best efforts to secure the council's approval on September 11 – not when it communicated its acceptance of the tenant's repudiation on December 15. Accordingly, since the landlord treated the lease as being alive until December 15, it was obligated to continue making its best efforts to secure the council's approval even after the tenant advised that it no longer wanted to continue with the lease on September 11. Failing to do so meant that the landlord did not perform all that was required of it under the lease.
Since the landlord could not demonstrate that it had fulfilled its contractual obligations under the lease, it was not entitled to damages or to retain the tenant's deposit.
Query how the outcome may have been different for the landlord if it had sent formal notice accepting the tenant's stated intention as repudiation of the lease. The landlord's obligation would have been at an end, however, the rent obligation would not have commenced and therefore the landlord may not have had much in the way of damages to claim against the deposit. However, if the landlord did have substantial damages at that time and the deposit language was broad enough and written appropriately, the landlord may have been able to retain the deposit and stop its obligations simultaneously.
Conclusion
To avoid being held to a higher standard than they bargained for, parties negotiating a lease must always carefully consider the effects of being held to a standard of "best efforts." If a party is unclear as to exactly what such a standard entails – or whether it is appropriate given the context of the lease – it may be prudent to aim for a lower standard (one of "reasonableness") when negotiating the lease. As the court in Diamond made clear, a party that fails to use its best efforts when it contracted to do so could face irreparable commercial harm.
Further, whatever efforts are agreed upon as the applicable standard, a party should be careful not to cease required efforts too soon, in order to avoid being found to have itself defaulted on its own obligations.
Case Law
Diamond Robinson Building Ltd. v. Conn, 2010 BCSC 76 (CanLII)
Atmospheric Diving Systems Inc. v. International Hard Suits Inc., [1994] 5 W.W.R. 719
Footnotes
1 With the assistance of Kelli Shoebridge, articling student.
2 Diamond at para. 82
3 Ibid. at para. 83.
4 Supra, note 2.
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