The High Court has found it necessary to imply a missing term into an overage agreement in order to give it business efficacy.
In Sparks v Biden, Mr Sparks owned land that was ripe for residential development. He had no experience of developing land and he entered into an agreement with Mr Biden, an experienced developer. Under the agreement, Mr Biden was granted an option to purchase the land. Under the option, Mr Biden had to apply for and use all reasonable endeavours to obtain planning permission. If the option was exercised and the sale completed, Mr Biden had to proceed as soon as practicable to construct the new houses in accordance with the planning permission.
Planning permission was granted and Mr Biden exercised the option. The initial purchase price was paid and the houses constructed. On the sale of each of the houses, Mr Sparks was entitled to receive an additional payment - an overage payment - which would be a total minimum sum of £700,000.
The option agreement and the overage provisions were agreed between the parties' solicitors but there was one crucial omission from the terms. While Mr Biden was obliged to obtain planning permission and, if he exercised the option, to construct the houses, there was no obligation on him to sell the houses once they were completed.
Mr Biden took advantage of this omission. Instead of selling the houses, he occupied one of them and let the remainder on assured shorthold tenancies. He argued that that he was not obliged to sell them unless and until he, at his unfettered discretion, decided to do so. Any obligation to pay overage could be delayed indefinitely by the simple expedient of not selling the houses.
Mr Sparks argued that this interpretation of the option fundamentally undermined its whole working and underlying purpose. He applied to court for a term to be implied requiring Mr Biden to market and sell each of the newly constructed houses either 'as soon as reasonably practicable' or 'within a reasonable period of time'.
It is not easy to persuade the courts to imply a missing term into a contract. The test it applies is one of necessity, not reasonableness, and it is a stringent test. For a contractual term to be implied:
- it must be reasonable and equitable;
- it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;
- it must be so obvious that 'it goes without saying';
- it must be capable of clear expression, and;
- it must not contradict any express terms of the contract.
Having considered the law about implying terms into a contract and the specific circumstances of the option, the judge agreed that a term should be implied into the option agreement to the effect that the buyer was under an obligation to market and sell each house within a reasonable time.
He concluded that the clause was one that was necessary as a matter of business efficacy and, without it, the option lacked practical or commercial coherence. He considered that the clause was so obvious that it went without saying that it should have been included.
There is no guarantee that the courts will intervene and imply a term into a contract where the parties have failed to deal adequately with the missing term. This is one of those cases where a little more forethought as to the terms of the transaction and the possible outcomes of the development process would have saved the parties the time, cost and stress of litigation in order to establish what should have been dealt with properly in the first place.
Sparks v Biden  EWHC 1994 (Ch)