The High Court has implied a term in an overage clause to give it ‘business efficacy’- showing us that the courts will look beyond a written agreement.
To understand the case of Sparks v Biden, let’s first remind ourselves with what overage actually is. Overage is the term used to describe an additional payment due to a seller of land which is payable after the sale has completed, and which the seller has reserved for itself upon the trigger (by the purchaser and now landowner) of certain events. The seller will usually negotiate an overage where there is an expectation that the land will later be developed and so enables the seller to have a ‘cut of the slice’ after the seller has parted any ownership interest with the land.
For more information on overage clauses, read our previous blog ‘Overage Clauses – 10 Things to Think About for Buyers’.
Sparks v Biden In this recent case, Sparks, sold a piece of land to Biden (the buyer and a developer), and reserved overage for himself over the land with a minimum payment of £700,000. The land had the benefit of planning permission and Biden proceeded to develop the land and constructed 8 houses. The overage arose on the sale of any newly constructed dwellings with any outstanding balance due on the sale of the last house. The overage clause, however, did not contain a provision that Biden was required to market and sell the houses, or any mechanism for the payment of overage if the houses failed to sell within an appropriate time. As a result, Biden argued that he had complete discretion as to when the sales of the houses would occur and the overage could be delayed until he chose to sell. Rather than selling the houses, Biden occupied one and let the remaining houses on short term tenancies.
Sparks argued that this undermined the agreement and applied to court for a term to be implied to require Biden to market and sell the houses ‘as soon as reasonably practicable’ or ‘within a reasonable period of time’.
The Courts Decision in Sparks v Biden 
The courts are not easily persuaded to imply a missing term. Here, the court applied the following conditions to the agreement (these conditions being developed over case law):
- it must be reasonable and equitable;
- it must be necessary to give business efficacy to the contract, so that no term will be
- implied if the contract is effective without it;
- it must be so obvious that ‘it goes without saying’;
- it must be capable of clear expression, and;
- it must not contradict any express terms of the contract.
As we know, Sparks was successful. Applying the above test to his judgment, the judge considered that such a clause was necessary as a matter of business efficacy otherwise the agreement lacked practical or commercial coherence, and, in his opinion, the clause was so obvious it goes without saying that it should have been included in the agreement.
Lessons learnt from Sparks v Biden 
Here, the drafting of the overage assumed that the expected would happen. Drafting overage provisions are a complex area of law, and this case is a reminder of the care that needs to be taken when carrying out such drafting and whilst the drafting should provide for unexpected events, it should also provide for the expected and assumed. The courts won’t always intervene, so it’s important that all parties agree what it expected and instruct their solicitor accordingly to provide for such expectations. If Sparks had done so, it may have saved him time and cost from the litigation process.
To discuss the implications of overage clauses or the sale and purchase of land in general, please contact BHW’s commercial property department on 0116 289 7000.
Categorised in: Commercial Property, NewsTags: Commercial Property, Overage Clauses