Sale of land for residential development – Overage – Construction of contract – Overage payment due to claimant vendor in event of total sales revenues from completed development exceeding specified figure – Overage payment triggered by final sale of a completed residential unit – Whether defendant purchaser entitled to avoid payment of overage by failing to complete or sell final units – Whether prevented by implied contractual terms – Claim allowed
By a contract dated October 2004, the claimant agreed to sell certain parcels of freehold land to the defendant for £425,000. The agreement was conditional on the defendant obtaining planning consent for a residential development, although it had the option of waiving that condition. In addition to the purchase price, there was provision for an overage payment to the claimant if the defendant achieved more than its anticipated sales revenue on the completed development; that payment was to be 50% of the defendant’s total sales revenue, in excess of £7,419,725, for all the completed residential units specified in the planning consent. The contractual mechanism for calculating the overage payment required the defendant to provide details of the total sales revenue to the claimant “not later than 20 working days after completion of the final sale of a completed residential unit on the development”.
The contract became unconditional in January 2006, when the defendant obtained planning permission for a development of 84 houses. The sale was completed in February 2006. By 2009, the defendant had sold 80 houses, receiving sales revenues of more than £9.5m, but four houses remained incomplete and unsold. The defendant rejected the claimant’s offer to purchase them in their completed state for £169,950 each. Had the offer been accepted, it would have triggered the claimant’s right to receive more than £1.295m overage in respect of the development as a whole. The defendant took the view that, since the 2004 agreement imposed on it no express obligation to build or sell the final residential unit, or indeed any unit, it could avoid paying overage by not completing the development.
In proceedings between the parties, the claimant submitted that terms should be implied into the contract requiring the defendant to market and sell all the houses as soon as reasonably practicable and at the best price obtainable, and not to withhold or delay any such sale to a willing purchaser. It sought an order for specific performance of those implied obligations or damages for their breach.
Held: The claim was allowed.
The implication of terms was a facet of the interpretation of a contract. The question was what the contract, read as a whole against the relevant background, would reasonably be understood to mean. The contract should be read in the way that a reasonable commercial person would construe it: Attorney-General of Belize v Belize Telecom Ltd [2009] UKPC 10; [2009] 1 WLR 1988 and Sirius Insurance Co v FAI General Insurance Ltd [2004] 1 WLR 3251 applied. The 2004 agreement obliged the defendant, in the event that it carried out the planned residential development, to complete and sell the final unit and to share equally any overage calculated in accordance with the contractual mechanism. The parties had anticipated that planning permission might be obtained for residential development on the land and that, if it were, the defendant would proceed with the development if it was profitable. Even though the defendant was not obliged to build the development for which planning permission was granted, and the parties had anticipated that it would not develop if it were not profitable, they had anticipated that if profits were made they would be shared. The agreed threshold figure for overage must have been calculated by reference to the defendant’s planned income from the residential development, with the parties anticipating that the sales revenue might exceed that sum. The agreed trigger for the overage payment was the “final sale of a completed residential unit”, which meant the sale of the remaining houses permitted by the planning consent. That final sale was part of the machinery for calculating the overage payment and it would be surprising, in the event that the development proceeded, if such a sale might not be achieved because of the defendant’s decision.
If the defendant decided to carry out the development, it had to be completed and the defendant could not frustrate the overage by not completing the final sale. Any provision that the defendant was not obliged to complete and sell the final unit would render the overage provisions inefficacious, futile and absurd: CEL Group Ltd v Nedlloyd Line UK Ltd [2003] EWCA Civ 1716 applied. The reasonable addressee of the agreement would understand it to mean that if the development were carried out, the defendant would complete and sell all the properties and would not sterilise the last unit so as to prevent the payment of overage and defeat the commercial purpose of the overage provisions.
The claimant was therefore entitled to specific performance of the defendant’s implied obligations. Damages would not be an adequate remedy since it was not clear that the defendant would be able to pay substantial damages. However, the claimant was not entitled to enforce a sale to it of the remaining houses since there was no contract in writing for such sale as required by section 2 of the Law of Property (Miscellaneous Provisions) Act 1989.
Tom Weekes (instructed by Pinsent Masons LLP) appeared for the claimant; Timothy Dutton (instructed by Hill Dickinson, of Liverpool) appeared for the defendant.
Sally Dobson, barrister
