The recent case of Sparks v Biden, in which the court implied a term into an option agreement, is another case in a long line which highlights the difficulties with agreeing and drafting overage provisions.
Overage is a term used for a situation where the seller is to receive a share in the increase in the property value of the land once it has been sold. Overage payments are usually agreed where there is a reasonable likelihood that the land will be redeveloped in the future or a valuable planning permission may be granted for the land.
The concept is quite simple but the different types of overage, the variety of trigger events for the payment of the increased share in value payable by the buyer to the seller and the complexity of the payment calculations are all reasons why the agreeing and drafting of overage provisions can cause so many problems. It is important for all the parties involved, including sellers, buyers and their solicitors, to think carefully about the terms of the overage and make sure expected and unexpected events that may occur during the overage period are considered in order to avoid one of the pitfalls which occurred in the following cases:
In Sparks v Biden, the court ruled in favour of the seller that a clause requiring the buyer to market the properties and sell the properties as soon as reasonably practicable or within a reasonable period of time should be implied into the option agreement. This was because it was necessary as a matter of business efficacy and without it the option agreement lacked commercial or practical sense. The court also found that the implied clause was so obvious that it goes without saying that it should have been included.
Good faith clause
The Renewal Leeds Ltd v Lowry Properties Limited case highlights that it may be appropriate for the option agreement to include an obligation on the parties to act in good faith and not to act in a way which reduces the overage payable or allows the buyer to avoid paying overage which would otherwise become due.
Trigger for paying overage and which properties are subject to overage
In Micro Design Group Ltd and another v BDW Trading Ltd the court held that the sellers, who had obtained the planning permission rather than the buyer, were not entitled to overage because the overage provisions were not triggered by the seller obtaining the permission.
In Bride Hall Estates Ltd v St George North London Ltd ambiguous drafting about whether car parking spaces were part of the residential units led to a difference of nearly £300,000 of potential overage. The court held that car parking spaces did form part of the residential units.
Overage payment formulas
The formula was so complicated in George Wimpey UK Limited v VI Construction Ltd that one of the parties didn’t realise part of the formula was missing. The court refused to allow rectification. We would advise that a worked example of the formula is included in the overage agreement to avoid this issue.
Secure the overage payment
A seller lost the opportunity to obtain a further £250,000 in Akasuc Enterprise Ltd v Farmar & Shirreff because its solicitor had not incorporated appropriate clauses to protect the overage payment.
Overage is not appropriate in all situations, particularly where there is a low likelihood of the land being developed. If it is being considered as part of a deal, the buyer and seller need to carefully weigh up the benefits against spending the time and money on agreeing complex provisions. When all the parties are in agreement that it is worth it, the parties need to make sure the overage agreement covers all eventualities and that they instruct legal advisors to protect their interests. The above is not an exhaustive list of issues to consider so we recommend legal and tax advice is obtained before entering into an option agreement.