Transactions involving overage are never straightforward. The litigation in Chartbrook Ltd v Persimmon Homes Ltd [2008] EWCA Civ 183; [2008] PLSCS 60 provides a classic example of the difficulties that often arise when dealing with complex overage calculations, especially if they depend upon a series of interconnected definitions.
The overage agreement in Chartbrook provided that the seller was entitled to “23.4% of the price achieved for each residential unit in excess of the minimum guaranteed residential unit value [that is, land value] less the costs and incentives”. What exactly did this mean? The seller argued 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 sales proceeds exceeded the minimum guaranteed amount.
Rimer LJ reduced the rival interpretations to algebraic formulaes to help in deciding whether the overage payment was either: (i) 23.4% x (price minus minimum guaranteed amount minus costs and incentives); or (ii) (23.4% x price) minus minimum guaranteed amount minus costs and incentives. He then tested these formulaes by inserting actual figures into the equations. The results were startling.
The first formula, which was favoured by the seller, yielded an overage payment that substantially exceeded the amount that had been produced when using the formula advocated by the developer. In addition, the figures produced when applying the developer’s favoured varied depending upon whether or not buyers were offered incentives, even though one might have expected the seller’s profit share to be unaffected by whether the developer sold at a low price, without incentives, or at a higher price, with incentives.
If the developer’s interpretation was correct, the majority of the Court of Appeal ruled that the parties’ agreement would have to be rewritten by inserting additional words in the overage formula. The court would also have to apply the deduction for “Costs and Incentives” at a different point in the overage calculation to eliminate the striking anomaly that the developer could reduce the overage payment by offering buyers incentives and then increasing the asking price for the property by a corresponding amount.
This case highlights the need for clear and simple definitions, using algebraic formulaes to guide third parties through complex mathematical calculations. Experimenting with worked examples will ensure that the formulaes are correct. Using worked examples in the agreement is also a useful guide to interpretation and could save substantial legal fees if a party is tempted to resort to litigation because it is unhappy with the bargain that has been struck.
It is worth noting that the pre-contract material pointed in favour of the developer’s interpretation of the overage agreement. However, the Court of Appeal ruled that evidence of the contractual negotiations was out of bounds, except in respect of the developer’s claim for rectification. However, this, too, was rejected, because their lordships agreed that it would be wrong to interfere with the conclusions reached by the trial judge after hearing the evidence.
Allyson Colby is a property law consultant
