There a times when having experienced legal advice isn’t just important; it’s essential.
Take the recent High Court case of Sparks v Biden as an example. A crucial omission in an overage agreement regarding the sale of land nearly cost Mr Sparks £700,000. But (thankfully for him!) the courts came to the rescue.
Here’s what happened…
When selling land that may be redeveloped in the future, a seller may negotiate an obligation enabling the seller to receive a share of the increased value of the developed land at a later date.
This type of obligation is known as an “overage” obligation and it allows the seller to both sell the property for its current market value and to share in any increase in value after the land is sold (a bit of a “have your cake and eat it” arrangement).
Overage agreements (sometimes called clawback agreements) are a rich source of litigation. That’s why there is the utmost need for care in drafting them.
Mr Sparks owned land with the potential for residential development.
He had no development experience so he granted Mr Biden, an experienced developer, an option to purchase the land.
Under the option agreement, Mr Biden was required to apply for and use all reasonable endeavours to obtain residential planning permission for the land. If planning permission was granted and Mr Biden bought the land, he was to construct the new houses as soon as was practicable. Under the overage agreement, Mr Sparks was entitled to an additional payment on the sale of each of the houses with a total minimum payment of £700,000. However, in a crucial omission, there was no obligation on Mr Biden to actually sell the houses.
Mr Biden obtained planning permission for the construction of eight houses, purchased the land and built eight houses.
Instead of selling the houses, Mr Biden occupied one of them and let the others out on assured shorthold tenancies. Mr Biden argued that, in the absence of an express obligation to sell the houses, the obligation to pay the sums due under the overage agreement could be delayed indefinitely.
Mr Sparks argued that this interpretation of the agreement with Mr Biden fundamentally undermined the whole purpose of their arrangement. He applied to court for a term to be implied into the agreement, requiring Mr Biden to market and sell each of the newly constructed houses within a reasonable timescale.
Courts are generally reluctant to imply terms into documents that have been freely agreed between the parties and will do so only when necessary. For a contractual term to be implied the court must be satisfied that all of the following conditions can be met:
- it is reasonable and fair to imply the term;
- the implied term is necessary to give business efficacy to the contract;
- the implied term is so obvious that it “goes without saying”;
- the implied term is capable of clear expression; and
- the implied term does not contradict any express term of the contract.
The court agreed with Mr Sparks that a term should be implied into the agreement with Mr Biden requiring Mr Biden to sell the houses.
The judge concluded that the implied term was one that was necessary as a matter of business efficacy and, without it, the agreement with Mr Biden lacked practical or commercial sense. The judge considered that the clause was so obvious that it “went without saying” that it should have been included.
Although Mr Sparks was successful in this case, there is no guarantee that the courts will assist by implying a term into a contract where the parties have failed to deal adequately with the missing term.
This case serves as a reminder of the importance of trying to anticipate all possible eventualities when drafting overage agreements and of expressly dealing with them. Experienced legal advice in dealing with overage agreements is crucial.