27th October 2017
Overage (or uplift) is often incorporated in the sale of land for development and allows for both an element of the consideration to be deferred and for a landowner to share in any unexpected uplift in the profitability of the development.
Overage Agreements are possibly some of the most heavily litigated contractual provisions and terms agreed between parties (often simplistically and in haste, when there is a desire to exchange or complete a transaction) will often be scrutinised and poured over in detail at a later date.
The recently reported High Court decision of Sparks v Biden concerned a situation where a landowner called Mr Sparks, had acquired over a period of time, land with development potential. Mr Biden agreed terms to purchase the land and then proceeded to develop it. The terms agreed between the parties entailed the payment of a purchase price of £600,000 together with overage constituting 33.3% of the sale price of each newly constructed dwelling. The overage only came into play where the sale proceeds exceeded a specified figure and the contract stipulated that the seller must in any event make a minimum overage payment of £700,000.
Planning Permission was obtained for the construction of eight houses on the property. Once built Mr Biden occupied one of the properties and let all of the other houses on assured shorthold tenancies.
In the absence of an express obligation to sell the houses, Mr Biden asserted there was no overage due.
Mr Sparks argued that a term should be implied into the sale contract that the properties, once constructed, should be sold (so as to trigger the overage payment).
Courts are generally reluctant to interfere in the drafting of documents and will only do so where satisfied that:
1.It is reasonable and equitable
2.The term is necessary to give business efficacy to the contract
3.The term to be implied is so obvious that it “goes without saying”
4.The term is capable of clear expression
5.The term does not contradict any express terms of the contract.
The Court concluded that in order to give the original sale contract business efficacy, a clause should be implied obliging the developer to sell the houses once constructed.
On one analysis this is a fair outcome. The implied term does however give rise to a whole host of other questions such as the price at which the properties are sold, whether they must be disposed of with vacant possession and what might, for example, have happened had the properties been sold off as “plots” before anything was constructed upon them.
Mr Sparks will no doubt be relieved by the judgment handed down by the High Court. The detail of the judgment makes it clear the importance of thinking through the implications and ramifications of any agreed terms and ensuring that, insofar as is possible, all contingencies and outcomes are addressed when contracts are entered into.
If you have any queries concerning the point raised in this blog, please contact Victoria Onoufriou on 02380 482482
Paris Smith LLP