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Stating the obvious: overage and implied terms
Commercial property partner, John Lomax looks at the recent case of Sparks v Biden  EWHC 1994 (Ch). This case gives guidance on how the courts will make use of implied terms to deal with situations whereby potential overage liability is avoided on technical grounds.
Facts of the case
The seller (Sparks) granted a developer (Biden) an option to purchase land with development potential. The agreement required the buyer to apply for planning permission and if the option was exercised, to develop the land as soon as practicable.
In addition to the sale price, the agreement entitled the seller to a minimum overage payment of £700,000 triggered by the first sale of any of the newly constructed houses, with a further payment becoming due on the sale of the final house.
Planning permission was granted and the buyer exercised the option and completed the purchase. The developer constructed eight houses on the land. Instead of selling the houses, the buyer occupied one house himself and leased the remainder on short term tenancies. In doing so he took advantage of an omission in the overage provisions which contained no obligation on him to sell the houses once completed, nor any longstop date for the further payment if the houses failed to sell within a given time. As a result, the developer argued he had complete discretion as to how the land was dealt with and as such, any obligation to pay overage could be delayed indefinitely until it was decided the houses would be sold.
The seller applied to court for a term to be implied into the agreement, requiring the buyer to market and sell each of the newly constructed houses either "as soon as reasonably practicable" or "within a reasonable period of time", arguing that the buyer’s interpretation of the option agreement fundamentally undermined the whole purpose of the agreement.
The court held in favour of the seller. It was held that a term should be implied into the agreement requiring the buyer to market and sell each developed house within a reasonable time. The judge considered that such a clause was necessary as a matter of business efficacy and that without it, the option agreement lacked practical or commercial sense. Further, the court decided that the implied term was in its view, so obvious that it would go without saying it should have been included in the agreement.
As recent case law (such as Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd ) has shown, it is not easy to persuade a court to imply a missing a term into a contract. However, in this scenario the courts showed their willingness to intervene where the parties failed to make adequate express provision, allowing one party to take undue advantage.
This case serves as a reminder of the potential traps inherent in overage drafting and the need for careful foresight, both as to the terms of the transaction and the potential outcomes of the development process, to ensure that the agreement holds up to future scrutiny.
Overage provisions are complex to draft and care must be taken to make provision in the agreement for the unexpected - as well as the expected - course of events.
If you require anything further, then please contact a member of the commercial property team.