The Court of Appeal today ruled that a developer which sought to avoid paying an additional £1.4m in overage on a Milton Keynes site by exceeding a 10-year deadline by only four days must now stump up the sum.
The court found that the developer had “manipulated the timetable” in a bid to prevent an overage agreement being triggered.
The case raised the important question whether, when a party takes on a “reasonable endeavours” obligation in an overage agreement, it is entitled to take into account its own commercial interests and to decline to take steps that it considers to be commercially irresponsible.
Abbeygate Helical (Leisure Plaza) bought the superior lease of the site known as the Leisure Plaza, at Elder Gate in Milton Keynes, for £2m in 2002, then secured the lease of an ice rink there from Planet Ice on 4 July 2003.
It paid an immediate premium of £1.525m for the ice rink lease, and agreed to pay an additional £1.4m in overage if planning consent and certain other conditions were met with 10 years of the purchase.
Seychelles-based Gaia Ventures bought the benefit of the overage provision from Planet Ice in 2011.
Planning permission for a supermarket and ice rink redevelopment was secured in time, granted in February 2013.
However it only secured the last piece of land to achieve site assembly on 8 July 2013, four days after the expiry of the 10-year “trigger date,” which Abbeygate claimed was due to delay in the financing of the deal.
Abbeygate denied liability to pay, so Gaia sued, claiming that Abbeygate had not used “reasonable endeavours” to satisfy the conditions that would lead to the payment of the overage.
Abbeygate maintained that it would have been commercially irresponsible to proceed with the required steps before they had the necessary funding in place.
In a ruling last year, High Court judge Mr Justice Norris found that Abbeygate’s approach in the months before the trigger date was motivated by “a desire to leave things as late as possible”.
Upholding the High Court ruling, Lord Justice Patten said the developer was under an obligation “to use best endeavours” to commence and proceed diligently with its development plans, but had “manipulated the timetable” to take the satisfaction of the necessary conditions beyond 4 July 2013.
“On any view,” he said, “that was a breach of clause 3.3 [of the overage agreement].”
Lord Justice Males added: “Reduced to its essentials, this is a case where Abbeygate undertook an obligation to use reasonable endeavours to achieve an outcome (obtaining a clear title to land) as soon as reasonably practicable. However, on the judge’s findings (which involved disbelieving Abbeygate’s witnesses), it did not do so. On the contrary, it devoted its energies to ensuring that the outcome would not be achieved until after the date when it would escape liability to make the overage payment.
“Although Abbeygate submitted that it was reasonable to delay until its funding for the development was in place, the judge’s clear finding was that its delay was motivated by a desire to avoid the overage payment.”
Alison Hardy, partner at Ashurst, said: “The Court of Appeal has confirmed that in assessing whether a party has used their reasonable endeavours, one should ask whether there is an objective justification for the time taken to satisfy the conditions.
“In this case, there were a few reasons running alongside each other, some more justifiable than others. It is now clear that profitability won’t always be left out of the question in deciding whether someone has used their reasonable endeavours.
“However, if a party knowingly and deliberately manipulates a timetable, to avoid a consequence such as payment of overage, then the court will have little sympathy.”
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