In Renewal Leeds Ltd v Lowry Properties Ltd, a seller sold some land for residential development. The sale contract provided that:
"Not later than 20 working days after completion of the final sale of a Completed Residential Unit on the Development the Buyer will provide to the Seller details of the Total Sales Revenue, together with the Buyer's calculation of the Overage payments."
Overage was defined as "Total Sales Revenue" in excess of £7,419,725. 50% of the overage was to be paid to the seller and 50% to the buyer. Payment was to be made within five working days of determination of the overage payment. The contract provided that the overage would be payable out of the proceeds of sale of the final completed residential unit, and the buyer's solicitors were to retain those sale proceeds in their client account pending calculation of the overage amount.
The buyer obtained planning permission for 84 homes. By 2009 it had sold 80 of the houses. Total sales revenue for those 80 houses was £9,618,375 - more than the overage threshold. However, the buyer left the final four houses incomplete and unsold. On its website the houses were shown for sale at £169,950 each. The market value for the houses when complete would be £135,000 each. Work stopped on the houses and the show-home on the development was sold.
The seller became concerned that the buyer was not seriously seeking a sale of the final houses, and offered the asking price for them. However, that offer was rejected by the buyer.
The sale contract did not contain any obligation on the buyer to build or sell any of the units. The seller argued that a term should be implied into the contract that the buyer would complete the houses, and would market and sell the houses as soon as reasonably practicable and at the best price reasonably obtainable (disregarding the extent to which the seller might be prepared to overbid due to its entitlement to overage).
The buyer argued that the implied term was inconsistent with the fact that, under the contract, the buyer could have waived the planning condition and landbanked the land, although this was not - in the event - what happened.
The court thought that it was not inconsistent with the buyer's freedom to decide whether or not to carry out the development, to hold that if the buyer did decide to commence development that it would have to complete it. It ruled that if the buyer was to carry out the residential development, it was obliged to complete and sell the final unit and share the overage payment. The buyer could not frustrate the overage by not seeing through the final sale.
The court ordered specific performance of the implied term in the contract, such that the buyer would be required to complete and sell the remaining houses.
Things to consider
A seller who may become entitled to an overage payment should seek to include good faith provisions in the contract. These could include an express obligation on the buyer not to act in any way to reduce or avoid the overage which might otherwise become due.