Sellers often use overage to maximise the price paid for land with development potential. Put simply, ‘overage’ is the right to receive further payments if and when certain events occur. There are various types of overage, including development, planning and sales. Transactions involving overage are rarely straightforward because such provisions are complex to draft, take time to negotiate, often lead to disputes and can result in negligence claims against the solicitors who drafted them. The dispute in Chartbrook Ltd v Persimmon Homes Ltd [2007] EWHC 409 (Ch) [2007] 11 EG 160 (CS) illustrates these problems and highlights the difficulties that can arise when the type or terms of an overage provision are altered during negotiations between the parties.
The seller in this case was claiming that it was entitled to 23.4% of the net proceeds of sale of each residential unit in excess of a minimum guaranteed amount. The developer argued that the seller was entitled to an additional payment only if 23.4% of the net sale price exceeded the minimum guaranteed amount. If the seller were correct in its interpretation of the provisions (which had been drafted by the developer’s solicitor), the developer sought rectification of the agreement
Negotiations between the parties took place over the course of a year and, consequently, there was a wealth of evidence concerning them. However, the judge ruled that that evidence was inadmissible and irrelevant to the interpretation of the agreement. Only the final document recorded the parties’ consensus, and the court was unable to attribute a particular private meaning to a word or phrase if it was expressly defined in the contract. The definition of the “additional residential payment” was clear and compelling, and the seller’s interpretation of the expression was correct.
Evidence concerning the parties’ negotiations did, however, lie at the heart of the court’s focus on the issue of rectification. The judge accepted that each party had had a different subjective intention regarding the agreement. The developer and its solicitor had made an extraordinary mistake over the meaning of the overage provisions in the agreement. However, in the absence of convincing evidence that the seller had acted unconscionably and was aware of the developer’s error, the judge rejected the developer’s claim for rectification.
There are good policy reasons for excluding evidence of the parties’ negotiations when construing, rather than rectifying, commercial contracts. Importantly, the rights and obligations created by a commercial contract comprise part of a party’s assets and liabilities, and third parties often need to understand or report on them. If previous negotiations were routinely admissible as an aid to construction, this would become impossible.
This case highlights the need, before contracts are exchanged, to experiment with worked examples using the overage formula prescribed by an agreement to ensure that it is correct and to communicate the parties’ intentions to third parties that may need to understand them by appending to the agreement copies of the worked example.
Allyson Colby is a property law consultant