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Many property agreements allow the developer to decide whether conditions attaching to planning permissions are onerous without imposing a parallel obligation to act reasonably.

Despite this wide discretion, recent case law has confirmed that there is still an implied duty to act in good faith. But what does this mean in practice? Last year, in Socimer International Bank Limited (in liquidation) v Standard Bank London Limited, the Court of Appeal reaffirmed previous cases, which formulated the principle that a decision maker's discretion will be limited by the need to act with honesty and in good faith.
The Court quoted from the judgement in a 1993 shipping case: “The essential question always is whether the relevant power has been abused. Where A and B contract with one another to confer a discretion on A, that does not render B subject to A's uninhibited whim.” This leaves the question of how far the courts will go in enforcing a duty of good faith and, importantly, does good faith mean that the decision maker must act reasonably? On this point, case law draws back in favour of the decision maker.

The decision maker can consult its own commercial interests when coming to a decision, and there is no requirement to make an objectively justifiable decision. In a 1998 banking case, the Court held that ‘...provided that the discretion is exercised honestly and in good faith for the purposes for which it was conferred, and provided also that it was a true exercise of discretion in the sense that it was not capricious or arbitrary or so outrageous in its defiance of reason that it can properly be categorised as perverse, the courts will not intervene'. Applying these case law principles to conditional contracts or options, there is a possible legal remedy for a landowner who considers that a developer has acted in bad faith in terminating an agreement on the basis of its decision that a planning condition is onerous. However, the onus is on the landowner to be able to show that the developer's decision was perverse, as if this cannot be proven, the claim will be unsuccessful. The wording used within the agreement will also be a key factor in any court assessment of the decision. To avoid any doubt over what is intended, it is important to ensure that any intended limits on decision making are expressed throughout property agreements consistently.

 

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