Jan 11

Overage Agreements – Sparks v Biden (2017) EWHC 1994 (CH)

Posted by gowenstevensadmin on Thursday 11th January 2018

Overage Agreements are often negotiated to give the Seller of a property a share in the later profits of a development over and above the original sale price. Although quite common, they are often complex and fraught with risk. It is notoriously difficult to predict future events and try to cater for them.

The High Court has recently held that a term should be implied into an overage agreement to require the buyer to market and sell its newly constructed houses within a reasonable time.

Background

Implied terms are terms that have not been expressly agreed by the parties, but are implied into the contract by the Court. Getting a Court to do this is very difficult – generally speaking the written contract is King.

A term can only be implied into a contract if that term is:

  1. Necessary to give business efficacy to the contract (business efficacy test).
  1. So obvious that “it goes without saying” (officious bystander test).
  1. Capable of clear expression and does not contradict any express terms of the contract

  2. Facts
  3. Mr Sparks granted X Limited an option to buy a piece of land in Wimbledon intended for residential development. X Limited assigned the benefit of the option to Mr Biden, who was the major shareholder in X Limited. The option agreement obliged Mr Biden to apply for and use all reasonable endeavours to obtain planning permission for a residential development and, if the option was exercised, to proceed with the development as soon as practicable. However, it did not oblige Mr Biden to market or sell the houses, once developed.Mr Biden tried to play this omission to his advantage, as the overage payment was linked to the sale of the newly constructed houses. Once the development was complete, he occupied one of the houses himself and let out the remainder on short-term tenancies, arguing that he could delay his obligation to pay the overage indefinitely.Mr Sparks argued that this interpretation of the option agreement fundamentally undermined the whole purpose of the agreement. He applied for a term to be implied into the agreement, requiring Mr Biden to market and sell each of the newly constructed houses either as soon as reasonably practicable or within a reasonable period of time.
  4. Decision
  5. The Court held in favour of Mr Sparks. It held that a term should be implied into the option agreement to oblige Mr Biden to market and sell each newly constructed house within a reasonable time of the option having been exercised and the planning permission obtained.The implied clause, said the Court, was both necessary as a matter of business efficacy and so obvious that it went without saying that it should have been included in the agreement. Without it, the option agreement lacked practical or commercial coherence.
  6. Comment
  7. This decision is a reminder to parties negotiating complex overage provisions to consider all the possible outcomes of the development process and to seek to provide for them in their drafting. The Court will apply a stringent test when deciding whether to imply a term into an agreement, especially where it has been thoroughly negotiated. Although Mr Sparks arguments proved sufficient to convince the Court here, there can be no guarantee that they will do so in the future. The Court was in this case clearly influenced by the fact that Mr Sparks was not an experienced property man, but rather a vehicle repairer. Mr Biden, on the other hand, was highly experienced in the property game. Some commentators have suggested that the decision is morally correct – but on the facts the decision could easily have gone the other way.


Paul Edmunds

11 January 2018

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