‘Best Efforts’ vs. ‘Commercially Reasonable Efforts’: What the Difference Is and Why It Matters

Chances are, your standard lease form includes one or more provisions requiring the tenant to exercise some kind of “efforts” to achieve a desired but uncertain result or outcome. The most likely possibilities: “best efforts”; “commercially reasonable efforts”; or “reasonable efforts.” While these phrases sound interchangeable, they have potentially significant variances in meaning that may prove decisive when the desired outcome doesn’t come to pass and the question becomes whether the tenant’s effort to make it happen were adequate. Here’s what you need to know to ensure the “efforts” clauses in your own lease give you adequate protection.

What’s at Stake

Some lease obligations are contingent on conditions that tenants can affect but not completely control. For example, tenants may need to obtain a liquor license to open a restaurant. Third-party agreements and/or zoning, environmental, and other approvals may also be required for certain kinds of contemplated uses. “Efforts” clauses are important because they balance the legal risks in the event the tenant is unable to achieve the outcome. As long as the tenant exerts the efforts required, its failure to achieve the desired result doesn’t constitute a breach.

When disputes arise, the question often becomes whether the tenant’s efforts were up to the standard specified in the lease. In most courts, the answer to that question turns on the specific kind of efforts the lease required.

Caveat: It’s important to recognize that the following analysis is based on general rules and that principles may vary. Thus, courts in a few states (including Massachusetts) treat “best efforts” and “commercially reasonable efforts” the same as requiring the exercise of good faith; by contrast, in many other states (including California), the differences are sharp, with “best efforts” falling somewhere above “commercially reasonable” but below fiduciary responsibility. And in still other states (including New York), the courts are divided on the issue.  

Best Efforts

“Best efforts” is the most stringent standard because it requires the tenant to pursue all reasonable methods to satisfy the lease obligation in accordance with what a person in the same industry would be expected to do under similar circumstances and conditions. Thus, for example, one unsuccessful attempt to obtain a cannabis license over the course of six months won’t do if it typically takes dispensaries at least 12 months and two applications to get a license. Pursuing “all reasonable efforts” might even require a third attempt.

However, there are also limits. A promise to use “best efforts” isn’t a guarantee and doesn’t require the tenant to take every conceivable action to accomplish the result. Nor is the tenant expected to incur ruinous costs or disregard its own reasonable interests. Key factors in evaluating the adequacy of a tenant’s efforts include:

• The tenant’s financial status, experience, and capabilities—well-financed tenants are generally expected to do more than thinly funded startups;
• The costs of the tenant’s performance compared to the financial benefits it stands to gain;
• Industry standards and practices;
• The landlord’s and tenant’s practices with respect to other similar leases; and
• Promises made during negotiations.  

Commercially Reasonable Efforts

“Commercially reasonable efforts” requires a tenant to exercise the efforts that a reasonable business entity would have made under similar circumstances. “Commercially reasonable” is only slightly less stringent than “best efforts” to the extent it doesn’t require “all reasonable actions.”

In construing “commercially reasonable efforts,” courts won’t engage in Monday morning quarterbacking or hindsight speculation about what the tenant should have done differently. Instead, they’ll look at the tenant’s efforts as a whole, judging them not on their personal opinions but by objective industry standards, practices, and customs. The other factors listed above that are used to evaluate “best efforts” also come into play in assessing “commercially reasonable efforts.”

Reasonable Efforts

A promise to use “reasonable efforts” generally requires a tenant do what it can and what’s reasonable in the circumstances. As with the other efforts standards, reasonable is a relative term based on the context, purpose, and value of the subject lease.

How to Protect Yourself

The biggest problem with efforts’ clauses is their uncertainty with regard to what’s required. The best way to protect yourself is to avoid using the clause and instead expressly require the tenant to achieve the desired outcome. This takes the question of whether the tenant used sufficient efforts out of play and focuses solely on whether the result was achieved.

But for that same reason, tenants are unlikely to accept this solution. Compromise: Include an efforts clause but set forth objective criteria for judging performance. There are two basic ways to do that.

Solution 1: Deal-Specific Efforts Clauses

The first approach is to spell out your exact expectations of what the tenant must do to achieve the desired result by:

• Specifying the activities and efforts in which the tenant must engage;
• Citing specific industry standards or benchmarks for gauging the tenant’s efforts;
• Including a time frame or set of deadlines for the tenant to perform certain obligations; and
• Setting a minimum—or maximum—amount the tenant will be required to spend to exercise the required efforts.

Practical Pointer: Include “among other things,” “including but not limited to,” or similar language to indicate that the listed provisions aren’t exhaustive and thereby imply that the tenant may have to take additional steps to exercise the required degree of effort.  

Solution 2: Clearly Define ‘Efforts’ Required

A more scalable approach that can work for a general lease form is to provide a detailed, principled definition of the kind of “efforts” required and limitations that apply. Here’s an example for “Reasonable Efforts”:

Model Lease Language

“Reasonable Efforts” means, with respect to a given goal, the efforts that a reasonable person in the position of Tenant would use to achieve that goal as expeditiously as possible, but which does not include:

a. Incurring any expenses not expressly contemplated by this Lease including:

(i) out-of-pocket costs incurred in gathering information and making filings with any governmental authority;

(ii) fees and expenses of advisors and consultants;

(iii) taxes, fees, and penalties charged by any governmental authority;

(iv) fees and penalties charged by any other person; and

(v) extraordinary employee costs;

b. Taking any actions that would, individually or in the aggregate, cause Tenant to incur costs, or suffer any other detriment, out of reasonable proportion to the benefits to the Tenant under this Lease;

c. Taking any actions that would, individually or in the aggregate, cause a material adverse change in the Tenant;

d. Changing the Tenant’s fundamental business model;

e. Taking any action that would violate any law or order to which the Tenant is subject;

f. Taking any action that would imperil the Tenant’s existence or solvency; or

f. Initiating any litigation or arbitration.