Tread carefully – overage is a minefield

Sellers and buyers alike are very fond of overage – but overage provisions can be complex and can sometimes have unintended consequences.

In the recent 2017 Sparks and Biden case, Mr Sparks granted Mr Biden, (an experienced developer) an option to purchase land for residential development. The Overage Agreement contained an obligation requiring Mr Biden to apply for and to use all reasonable endeavours to obtain planning permission for a residential development.

The obligation to pay the overage arose on the sale of each dwelling, and on the sale of the final dwelling.

Mr Biden tried to delay the payment of overage by occupying one of the newly constructed houses himself and by letting the remainder of the houses out on short-term tenancies.

By doing this, he thought he could delay his obligation to pay the overage indefinitely.

However, the High Court took a different view. The High Court was prepared to imply into the Overage Agreement an obligation on Mr Biden to market and to sell the newly constructed houses within a reasonable period of time.

It was a happy day in Court for the seller, Mr Sparks, when the Court agreed with his argument that Mr Biden’s interpretation of the Overage Agreement fundamentally undermined the whole purpose of the Agreement.

In this particular case, the High Court stepped in to give commercial efficacy to the contract, but there is no guarantee that the court will do that in every case.

This is a timely reminder, for Sellers and buyers that in order to avoid the time and expense of litigation later, the parties should think very carefully about the terms of any overage arrangements at the outset.