Overage: getting the triggers right
The procedures by which a seller can share in any post-completion increase in value can be problematic as illustrated by the recent case of Sparks v Biden.
Sparks owned land capable of being developed for 8 houses and entered into a 3 year option agreement with Biden in 2005. Biden was obliged to use "all reasonable endeavours" to obtain planning permission and once granted could exercise the option for £600,000. If exercised, he had to "proceed as soon as practicable to construct the development" and pay overage at 33.3% per 'sale' (defined as freehold or long leasehold) but this was not due until the sale proceeds reached £1.6 million.
There was no obligation on Biden to market and sell the houses. The option was extended in 2008 and varied reducing the price to £500,000 and the sales trigger to £1.5 million but with a minimum overage payment of £700,000. Planning was granted in 2007, the option triggered and once built Biden let 7 homes on assured shorthold tenancies, moved into the final house and claimed that no overage was payable. The court considered three issues.
Should provisions be implied requiring the marketing and sale of the houses?
The court held this was not a case of a 'bad bargain' and provisions should be implied to give business efficacy to the agreement between the parties that there was an expectation of overage evidenced by:
- Biden being under an obligation to use "all reasonable endeavours" to obtain planning permission for the development
- Having exercised the option, Biden had to proceed to construct the development "as soon as practicable"
- The stated minimum overage payment of £700,000
If so, what was the time frame within which the sales had to occur?
The court held they had to occur "within a reasonable period of time". This allowed Biden the flexibility to take account of market conditions and so he could potentially justify a delay if prices were depressed. The judge considered that this was sufficiently clear so as not to be void for uncertainty.
What if any remedy did Sparks have?
Damages were not considered an adequate remedy and the court made an order for sale, adjourned pending calculation of a reasonable time period.
Although Sparks was successful, the case highlights the trap for sellers of a trigger linked to the final sale of a completed residential development where there is no corresponding buyer obligation to build and sell the final unit or indeed to build and sell any units at all.
- obliging the buyer both to submit marketing plans for approval and market units in good faith.
- imposing earlier triggers linked to phased completions or a fixed final date.