142: Will a court imply terms into an overage agreement when key wording is missing?
Overage often describes the situation where a seller takes a share in any increase in value of a property that is realised after the initial sale ie where there is a reasonable expectation that the land may be redeveloped or planning permission obtained in the future.
A dispute in Sparks v Biden highlights that there are different types of overage that arise in different circumstances. A buyer of land purchased for redevelopment decided not to sell the residential houses once they had been built. Instead, he lived in and rented out the properties which meant he avoided paying overage to the seller.
Should the original buyer be placed under an implied obligation to sell the houses and pay the original seller overage where an express obligation had been omitted? The High Court were asked to consider this question.
Mr Sparks (seller) granted Mr Biden (buyer) an option to purchase land with potential for residential redevelopment. The option agreement required Mr Biden to use all reasonable endeavours to obtain planning permission for residential houses and to proceed with the development as soon as possible.
Planning permission was obtained by Mr Biden and he exercised the option to purchase. Eight houses were built on the land once Mr Biden was the owner and he took up residence in one of them, whilst renting out the others on short term tenancies.
Pursuant to the option agreement, Mr Biden was required to pay Mr Sparks an overage payment calculated under a formula, but only on sale of each of the houses. By living in and renting out the houses, Mr Biden avoided paying any of this overage to Mr Sparks.
The original option agreement did not contain an obligation for Mr Biden to have to market the houses for sale, nor did it require him to sell the houses within any time period. Mr Biden’s view was that the overage could be delayed indefinitely until such time as he decided to sell them on.
Mr Sparks was unhappy with this interpretation and applied to the court for a term to be implied into the agreement requiring Mr Biden to market and sell the houses within either (i) a reasonable period of time or (ii) as soon as reasonably practicable. Most positive overage covenants for residential development contain an obligation on the seller to sell the redeveloped houses or flats before a cut-off date. This had not been included in the option agreement.
The High Court decision was in favour of Mr Sparks. The court implied a term into the agreement requiring Mr Biden, an experienced developer, to market and sell the houses with a reasonable time frame. It was held that such a clause needed to be implied into the contract as a matter of ‘business efficacy’, otherwise it lacked a practical or commercial purpose.
The judge also applied the ‘officious bystander test’ which means that the clause to be implied was found to be so obviously required that it goes without saying that it should have been included in the agreement.
Our last blog on overage pointed out that agreements must be very clear about what is and is not included to trigger the uplift payment. This recent case highlights another trap that lies in wait for the unsuspecting seller when dealing with overage and that the parties must try to cover every possible eventuality when drafting such clauses.
As well as including a clause obliging the seller to sell the development within a specified time period, another safety net for the seller would have been to ensure a valuation was required at the end of the specified sale period. This would assess the market value of the development at the cut-off date and require the seller to pay overage at this amount.
Unusually, the court were persuaded to imply a term into the agreement which worked in the original seller’s favour allowing him to benefit from the overage. It is safer to make sure you have express wording in your contract covering all eventualities rather than relying on a judge’s discretion, particularly when the courts are often reluctant to add wording which should have been there from the start.
5 March 2018