Overage disputes have featured regularly in recent case reports. The litigation in Transview Properties Ltd v City Site Properties Ltd [2008] EWHC 1221 (Ch); [2008] PLSCS 158 concerned the absence of an overage abatement clause from an agreement for sale. The buyer sought to have the agreement rectified and to be absolved from liability for the overage.
The High Court dismissed the claim. The judge rejected the buyer’s claim that the seller had removed the overage abatement clause from the agreement for sale without the buyer becoming aware of its removal. The judge decided that the clause was removed from the document at the buyer’s own request because its mortgage advance had been calculated on the assumption that the price for the property included the overage payment. Consequently, the agreement for sale was executed in a form that precisely accorded with the parties’ intentions and therefore there were no grounds on which the court could rectify the agreement.
The judge accepted that the buyer had intended to mitigate its liability to pay overage by the use of a side letter. He concluded that the buyer had sought to use a side letter (as opposed to a provision in the sale agreement) to minimise the risk that this particular aspect of the transaction might be brought to the attention of its bank. However, as a result of an oversight, the side letter that was prepared and signed by the seller, for delivery to the buyer, but was filed in a drawer and never left the seller’s offices.
In addition, it was a condition of the overage abatement agreement in the side letter that the buyer cleared various outstanding debts to the seller within six months. In the events that occurred, the side letter would have been of no assistance to the buyer, because it did not clear the buyer’s debts to the seller until after the deadline.
The case underlines the danger of omitting essential terms from contracts. In cases where a side letter is appropriate, here are some practical tips: (i) never use side letters without legal advice; (ii) consider whether the side letter will be legally binding and, if so, upon whom; (iii) ensure that the use of a side letter will not vitiate the contract – this is essential when dealing with contracts relating to land, because section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 requires contracts for the sale or disposition of interests in land to incorporate all the agreed terms; (iv) parties can comply with section 2 by ensuring that their contract refers to, and incorporates the terms of, any agreed side letters; (v) ensure that the terms of the side letter will actually achieve the parties’ aims; and (vi) parties should sign and exchange duplicate letters, which should be placed, and kept, with the contracts to which they relate.
Allyson Colby is a property law consultant
