Overage agreements enable parties to sell and purchase land at a time and for a price that suits them both, but can result in subsequent disagreements about their scope and effect. In particular, if an overage agreement is not watertight, an unscrupulous buyer may try to take advantage of loopholes in the wording to escape liability. As a result, sellers would be well advised to ensure that triggers are not limited or restricted to events that will yield little or nothing for the seller.
Sparks v Biden [2017] EWHC 1994 (Ch); [2017] PLSCS 170 concerned an option that provided for the payment of overage when any new dwellings were sold. But, instead of selling the new dwellings, the buyer let them under assured shorthold tenancies of varying lengths – and even occupied one of the new houses himself.
The buyer claimed that he was not obliged to sell any of the eight new houses that he had constructed unless and until he, in his unfettered discretion, chose to do so. Indeed, the option agreement did not require him to sell any of the properties within a specified period (although there were covenants requiring him to apply for planning permission and to progress the development). Therefore, any obligation to pay overage could be delayed indefinitely.
The seller drew the court’s attention to the fact that the option agreement was relatively compressed and argued that it was, therefore, unsurprising that it did not impose an obligation to sell. However, the contractual provision requiring the buyer to proceed as soon as practical to construction made little sense if the buyer could avoid paying overage indefinitely by not selling – and the agreement would lack commercial coherence if a term was not implied requiring the buyer to market and sell the each of the newly constructed houses “as soon as reasonably practicable” or “within a reasonable period of time”.
The judge agreed that the factual matrix pointed towards the implication of a term requiring the seller to sell the developed properties so that overage became payable. It was clear that the seller intended to benefit personally from the sale (and overage provisions) and that his age was such that he must be approaching – and needing to provide for – retirement. It was theoretically possible that the seller was interested in increasing the housing stock in the area, but it was more likely that the obligations that were, in fact, imposed on the buyer were directed at bringing about a situation where overage would become payable.
Where a contract does not expressly, or by necessary implication, fix any time for the performance of a contractual obligation the law usually implies that it shall be performed within a reasonable period. Consequently, the judge decided to imply a term into the option agreement requiring the buyer to market and sell the houses constructed on the development within a reasonable time of the option having been exercised and planning permission having been obtained. Such a clause was necessary as a matter of business efficacy and was so obvious that it went without saying. Furthermore, without it, the option agreement lacked commercial or practical coherence.
Allyson Colby is a property law consultant
