The term “overage” describes additional sums that a seller hopes or expects to receive for land that may be developed but which is sold before its development potential is fully realised. However, if an overage agreement is not watertight, an unscrupulous buyer may try to take advantage of loopholes in the wording to escape liability.
Anecdotal stories have circulated about developers that retained the last unit on a development in order to avoid paying overage; in Renewal Leeds Ltd v Lowry Properties Ltd [2010] EWHC 2902 (Ch); [2011] PLSCS 22, the seller had to seek help from the court to rescue an overage payment in precisely such circumstances.
Under the terms of the parties’ contract, the developer was not liable to pay overage to the seller until the last house on the development had been sold – and was not obliged to build or sell any of the units. In addition, the only mechanism to secure the overage was a contractual provision under which the developer had to retain the proceeds from the sale of the last house, pending the calculation and payment of the overage.
The developer offered the final four properties on its development for sale at prices that exceeded their market value and refused to sell them to the seller at the asking price because it was not commercially expedient to do so. The seller therefore asked the court to imply additional terms into the overage agreement requiring the developer to sell the houses at the best price reasonably obtainable (after disregarding any special bid from the seller).
The court accepted the need for caution when dealing with applications to imply additional terms into contracts but upheld the seller’s claim. One of the tests used to ascertain whether or not additional terms should be implied is that of the “officious bystander”.
Consequently, the court asked what the parties would have said if, while reaching their agreement, an officious bystander had asked whether, if the developer were to carry out the anticipated residential development, it would be entitled to suspend or abort the sale of the remaining units to avoid paying overage. The judge decided that the parties would have refuted any such suggestion and granted an order for specific performance of the implied obligations.
Landowners will be relieved by the decision. However, each case will turn on its own facts. Thus, sellers would be well advised to anticipate future contingencies and draft accordingly.
In particular, they should avoid triggers for payment that can be easily delayed or avoided. It is also advisable to define the term “disposal” as widely as possible because disposals can be effected in numerous ways. Sellers should also consider whether it would be desirable to incorporate provisions for “deemed disposals” and to include valuation provisions to deal with transfers at an undervalue and consideration that is given in kind. In addition, a contractual duty of good faith is often beneficial.
Allyson Colby is a property law consultant
