What is an overage agreement?
An overage agreement is a formal agreement entered into by the seller and buyer of property where there is a reasonable expectation that it will be developed, or that a valuable planning permission may be granted, allowing the land to be sold at an increased value as a result.
Such an agreement will enable the original seller to share in any increase in value of the property after the occurrence of the triggering event, for example the grant of planning permission or the sale of the completed development etc. The seller can sell the property and receive its present market value now, yet still be able to benefit from the property’s development potential.
However, such agreements can be very contentious and are very often unattractive to buyers. Furthermore, overage agreements are complex contracts requiring very careful drafting in order to avoid the expensive litigation which may arise from any disputes about their terms.
The case of Sparks v Biden (2017) highlights the critical importance of careful drafting of overage agreements and some of the contentious issues which may arise from them. In brief terms, Mr Sparks, who owned and with the potential for construction of residential properties, entered into an overage agreement with Mr Biden (a developer) whereby, under the terms of a wider agreement, Mr Biden was to apply for and to use all reasonable Endeavour’s to obtain planning permission residential development. Once the permission was granted new houses were to be built and (under the overage agreement) Mr Sparks would be entitled to a share of at least £700,000.00 on the sale of the houses. The matter came before the Court due to a flaw in the overage agreement which placed no obligation on Mr Biden to actually sell the new houses. Mr Biden decided to let the houses on assured short hold tenancies and occupied one house himself.
Mr Biden argued that, as there was no express obligation for him to sell the freehold of the houses, he was not obliged to pay Mr Sparks the sums he would be due under the overage agreement. Mr Sparks asked the Court for a term to be implied into their agreement requiring Mr Biden to sell the houses within a reasonable timescale and argued that Mr Biden’s failure to sell the houses fundamentally undermined the principle of their agreement and the Court agreed with him.
The Court’s rationale was that it was necessary that a term should be implied into their agreement as a matter of business efficiency and that Mr Biden’s failure to sell the houses lacked practical commercial sense. The judge went on to say that the clause would be so obvious that it would go without saying that such a clause should be included.
Nonetheless, sellers of land cannot rely on the Courts to intervene by implying terms into negotiated agreements and the Court’s decision should, arguably, be treated as the exception rather than the norm. Usually, should a term be omitted from an overage agreement, the seller would have to accept the consequences of such an omission.
Unsure of what you need to do?
Our Commercial Property department can answer any enquires you may have in relation to overage agreements. We can also draft and advise on new overage provisions in relation to the sale of develop-able land.