The recent judgment in Sparks v Biden (2017) EWHC 1994 (Ch) is a stark reminder to parties involved in option and overage agreements that as far as possible they should ensure that all eventualities are considered and covered in the drafting. Although the Court had sympathy with the Claimant landowner on this occasion, it would be wise to ensure that even the most obvious obligations are documented with express terms.
The Claimant (Mr Sparks) granted an option to purchase his land in Wimbledon to Linkwood Consultants Ltd (Linkwood) which subsequently assigned the benefit of the option to the Defendant (Mr Biden). The option contained overage provisions which required the Defendant to pay a minimum of £700,000 to the Claimant upon the sale of any of the houses.
Each party instructed solicitors to act for them and the agreement was not on standard terms. The Claimant had acquired the land parcel by parcel over a period of time and had hoped that the land's development potential would provide him with a pension fund. He was in his 60s and did not deal with property professionally but ran a vehicle repair business with a business partner. In contrast, the Defendant was a developer with 35 years' experience and Linkwood was his company.
The Defendant obtained planning permission for the construction of 8 houses on the land. The houses were built between 2012 and 2015 but instead of selling the houses, the Defendant moved into one and let the remaining 7 on assured shorthold tenancies.
The option agreement did not contain an express term requiring the Defendant to sell the houses which would trigger the overage provisions. The Defendant's position was that he was not required to sell the houses and that overage was not payable until a sale took place, if ever. The Court was asked by the Claimant to decide whether it should imply a term requiring the Defendant to sell.
The Claimant argued that it is not surprising that there was no express term requiring sale, particularly as the option agreement itself is relatively compressed. He also said that a non-sale would not have been a likely outcome. Further arguments were that it was obvious that the houses should be sold and that the obligation on the Defendant to obtain planning permission and construct the houses as soon as practicable would make little sense if he was then not required to sell and trigger the overage payment. Finally, the Claimant submitted that without the term being implied the agreement makes no commercial sense.
In response, the Defendant's position was that the parties were legally represented and undertook lengthy negotiations when agreeing the option. He also argued that it was not obvious that a term should be implied or that a term was necessary to give the agreement business efficacy.
HHJ Davis-White QC decided that an express term requiring the Defendant to market and sell the houses within a reasonable period of time should be implied into the option agreement.
The key reason for this was that the agreement already required the Defendant to use all reasonable endeavours to obtain planning permission, to proceed with construction as soon as practicable and then to pay overage. It is difficult to see why the parties would have agreed to these obligations unless the sale of the houses, and therefore the overage payment, would follow. Also, while the Defendant may not have known the details of the Claimant's plans for the overage payment to fund his retirement, he would have been aware that the Claimant was in his 60s and that he had or was about to retire from his business. In addition, the clause is needed for business efficacy and is so obvious that it goes without saying.
Although this judgment may assist those parties seeking to compel the sale of property under existing options without express clauses, parties should ensure that the drafting of future options and overage agreements is clear and unequivocal on as many eventualities as possible, even if they appear obvious or highly unlikely such as the requirement to sell and when sale should take place to avoid the buyer retaining and letting the property.
It would be risky to seek to rely on this judgment rather than to include what should be an uncontroversial term at the outset. This is particularly the case when the parties are legally represented and of similar experience, which of course Mr Biden and Mr Sparks were not.