The recent case of Sparks v Biden highlights the lengths to which some developers might go in an attempt to avoid paying overage.
Mr Sparks (Seller) entered into an option agreement with Mr Biden (Buyer) for the sale of land for a residential development. The Buyer agreed to make an overage payment to the Seller calculated according to an agreed formula, with a minimum total payment of £700,000. The obligation to pay the overage to the Seller was triggered by the sale of any newly constructed dwellings, with the balance due on the sale of the final one.
The option agreement contained obligations on the Buyer to use all reasonable endeavours to obtain planning permission for a residential development of eight new houses and, if the option was exercised, to proceed with the development as soon as practicable.
Having obtained planning permission and exercised the option, the Buyer built the eight houses as per the planning permission and in accordance with the terms of the option. However, rather than selling the dwellings as had been anticipated, he occupied one himself and let the rest on assured shorthold tenancies.
By doing so, the Buyer argued that no overage payment was due as the trigger for the payment was the sale of the dwellings (by way of a freehold transfer or long lease) and the granting of assured shorthold tenancies didn’t count.
The Seller commenced proceedings on the basis that an implied term of the option agreement (i.e. the obligation to sell) had been breached by the Buyer.
Question for the Court & Decision
Should a term be implied into the option agreement requiring the Buyer to market and sell the newly constructed houses within a reasonable time of planning permission being obtained and the option having been exercised?
The Court decided that a term to that effect should be implied as it was necessary to give business efficacy to the agreement, and without it the option agreement lacked practical or commercial coherence.
As the implied term of the option agreement had been breached, the Seller was entitled to a remedy of specific performance obliging the Buyer to sell.
Although the Court found in favour of the Seller in this case, it would obviously have been preferable not to have had to litigate this matter (especially as cases on implied terms are very much confined to their own facts, so there is no guarantee that a Court would reach the same conclusion in a slightly different scenario). If the option agreement had included an express clause to address a situation where the Buyer chose not to sell, then the Buyer would have had no argument to make and there would have been no reason for the Court’s involvement.
This case again highlights the importance of the drafting in overage agreements and of trying to anticipate (and draft for) all possible scenarios. With this in mind, there is never really a ‘simple’ overage agreement.