Overage Update: Sparks v Biden  EWHC 1994 (Ch), All ER (D) 144 (Aug)
A recent High Court case on overage evidences how the court will imply a term into an agreement where it is necessary to give business efficacy to the contract, and in situations where without the implied term, the agreement lacks practical or commercial coherence. This case shows that Courts are reluctant to allow developers to escape liability to make an overage payment on the basis of a technicality, where the agreement was freely negotiated between the parties.
The case is of relevance to NHS bodies pursuing disposals of surplus estate and highlights the need for comprehensive and carefully drafted overage clauses.
Summary of facts
Mr Sparks (S) owned a piece of land which he wanted to develop upon but did not have the experience to do so. S therefore entered into an option agreement with a company who had development experience - Mr Biden's (B) company (the benefit of said agreement was later assigned to B directly) - whereby B agreed to apply for planning permission over S's land. If planning permission was granted, B could then exercise an option to purchase the land within one month.
The option agreement contained an obligation for B to make overage payments to S on the sale of any newly constructed dwelling, including an obligation to make a minimum overage payment of £700,000.00 once the overage provisions had been triggered.
B obtained the planning permission, exercised the option and then built the planned houses, but instead of selling them, he moved into one and let the other seven out for rental income.
S argued that a term should be implied into the option agreement requiring B to market and sell the new houses.
What the court held
Judge Davis-White QC of the Chancery Division concluded: "In my judgment, a clause falls to be implied into the Option Agreement to the effect that the Buyer is under an obligation to market and sell each house constructed as part of the Development within a reasonable time of the Option having been exercised and the planning permission having been obtained. Such a clause is one that is necessary as a matter of business efficacy and without it the Option Agreement lacks practical or commercial coherence. Furthermore, I consider that the clause is so obvious that it goes without saying."
Conclusion and commentary
The purpose of the option agreement was to allow S to realise the development potential of the land he owned and B agreed to help achieve this by way of his expertise and experience. It was clearly not Mr Sparks' intention that the land would be sold without him being rewarded for the development potential of the land. It is unlikely that Mr Sparks would have entered into the agreement if it was known that Mr Biden would not sell the properties and no overage payments would be made. It was always believed the properties were to be sold. It is therefore clear that the Court will view the presumed intention of the parties objectively, regardless of whether there is proof of actual intention.
In this case, the Court believed that from Mr Sparks' perspective, the obligations in the agreement were intended to allow him to realise the value of the development, and bring about a situation where overage would be payable. Otherwise there would be no reason for S to impose or enforce these obligations.
What are the practical implications?
Each case has its own facts and there is no guarantee that the findings in this case could be equally applied to another case with similar facts.
What is important for landowners negotiating overage agreements is to consider all of the possibilities, however unlikely they seem, and where possible loopholes are identified, insert an express provision into the agreement which prevents that loophole. In this case it was clearly not foreseen that Mr Biden could keep the properties and let them out instead of selling them.
At Bevan Brittan, our experience of acting for NHS bodies disposing of surplus estate means that we are able to negotiate and put in place effective overage provisions that are market facing but also fully protect the public interest. We are able to identify and close potential loopholes in drafting and ensure that our client's interests are well protected. In financial year 2017/2018 we acted for NHS bodies on the sale of over £100m of surplus estate.