Option agreement – Implied term – Overage – Claimant landowner entering into agreement granting defendant developer option to purchase land for specified price plus overage – Obligation to pay overage depending on sale of newly constructed houses – Whether term to be implied requiring defendant to market and sell houses as soon as reasonably practicable or within reasonable period of house being constructed – Claim allowed
The claimant had acquired over time an area of land at Havelock Road, Wimbledon which had potential for residential development. There was a house on the land, divided into two residential flats, and some garages. The defendant was a developer who had entered into development agreements though his company (L). A development of about eight houses was proposed on the land.
An option agreement was entered into which contained the grant of an option to L to purchase the land. If the option was exercised, the purchase price under the resulting contract for sale was £600,000, together with overage, provided certain conditions were met. The option agreement required the buyer, within three years from the date of the agreement, to apply for the relevant planning permission and to use all reasonable endeavours to obtain it. The buyer’s option over the land could be exercised within the same three-year period subject to one qualification. If the relevant planning permission was formally issued within the three-year period, the buyer had one month from the formal issue of permission to exercise the option. If the option was exercised and the sale completed, the buyer was required to proceed as soon as practicable to construct the development.
Overage arose once any one of the new dwellings was sold. The obligation to pay overage depended on sales of the newly constructed dwellings but overage did not fall due in respect of the first £1,600,000 (later £1,500,000) received from relevant sales and any outstanding balance of the minimum payment of £700,000 only became due on the sale of the final dwelling to become ready for occupation. A supplemental agreement varied the option agreement and L assigned the benefit of the option to the defendant who exercised it.
The houses were constructed but, instead of selling them, the defendant let all but one of the houses on assured shorthold tenancies. The defendant argued that there was no express term in the option agreement requiring him to sell. Therefore, any obligation to pay overage could be delayed indefinitely by the simple expedient of him not selling any of the new houses. The claimant claimed that a term was to be implied requiring the defendant to market and sell each of the newly constructed houses as soon as reasonably practicable or within a reasonable period of time of the house being constructed.
Held: The claim was allowed.
(1) The issue was whether a term should be implied into the option agreement in the light of its express terms, commercial common sense and the facts known to the parties at the time the contract was made, which imposed an obligation on the buyer to sell the newly developed houses within a particular time period. If a contract did not expressly provide for what was to happen when some event occurred or in some situation then the most usual inference was that nothing was to happen. If the parties had intended otherwise they would have stated that in the contract. However, there were circumstances in which the court would imply a term into the contract. That was where the term satisfied the applicable tests based on necessity.
(2) For a term to be implied, it had to: (i) be reasonable and equitable; (ii) be necessary to give business efficacy to the contract, so that no term would be implied if the contract was effective without it; (iii) be so obvious that it went without saying; (iv) be capable of clear expression; and (v) not contradict any express terms of the contract. A term could only be implied if, without it, the contract would lack practical or commercial coherence. A term should not be implied into a detailed commercial contract merely because it appeared fair or because the judge considered the parties would have agreed it if it had been suggested to them. The test was a stringent one of necessity, not reasonableness. Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72; [2016] EGLR 8 applied.
(3) In the present case, the overall terms of the option agreement pointed towards an implication of a term requiring the seller to sell developed properties so that overage became payable. The key factor was the structure whereby the buyer was placed under an obligation: (a) to use all reasonable endeavours during the option period to obtain planning permission; (b) after completion of the sale of the contract arising from the exercise of the option to proceed as soon as practicable to construct the development; and (c) to pay overage, which in principle was triggered as an obligation once any of the newly constructed houses was sold in a minimum sum of £700,000. The obligations in (a) and (b) were clearly premised on the basis that all reasonable efforts to carry out the development were carried out as soon as possible. That had to be with a view to the realisation of the value of the development and the entitlement to overage. The natural reading of the option agreement was that obligations (a) and (b) were directed at bringing about a situation where the overage would become payable.
(4) In all the circumstances, a clause fell to be implied into the option agreement to the effect that the buyer was under an obligation to market and sell each house constructed as part of the development within a reasonable time of the option having been exercised and the planning permission having been obtained. Such a clause was necessary as a matter of business efficacy and without it the option agreement lacked any practical or commercial coherence. Furthermore, the clause was so obvious that it went without saying.
Tom Weekes QC (instructed by Gregsons Solicitors, of Wimbledon) appeared for the claimant; Nathaniel Duckworth (instructed by Field Seymour Parkes, of Reading) appeared for the defendant.
Eileen O’Grady, barrister
