Interpreting overage: what does case law say?

Developers who believe the strict terms of their contracts may provide a way out of paying overage could be in for a surprise from the courts, according to Tom Weekes QC When land is sold to a developer, the contract of sale will sometimes include provisions requiring the developer to pay overage in the event that the developer is able to realise the land’s development value. A contract might, for example, require the developer, if it carries out a development consisting of houses and then sells those houses, to pay to the seller a share of its profits. But the drafting of overage provisions is not easy. A “deal” involving overage can seem relatively straightforward, yet, as the drafting is undertaken, it can be revealed to be relatively complicated. That means that, often, the drafting of overage provisions is less than perfect. A developer can then seek to exploit (what it sees as) a loophole in the drafting in an attempt to avoid paying overage. Interpreting overage provisions A central concern of English law over the past few decades has been the principles governing the interpretation of contracts. There have been significant shifts of approach.  At one time, the House of Lords (and especially Lord Hoffmann) emphasised the inherent flexibility of language and the desirability of ensuring that contracts were interpreted in a way that accorded with “commercial common sense”. Then, during the presidency of Lord Neuberger, the Supreme Court has reasserted the primacy of the natural meaning of language in the interpretive process (see Arnold v Britton [2015] UKSC 36; [2015] EGLR 53), and, in a related development, adopted a restrained approach to the implication of terms (see Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72; [2016] EGLR 8). However, when it comes to the interpretation of overage provisions, the courts, throughout this ebb and flow of legal principle, have consistently been willing to imply terms into contracts of sale in order to frustrate attempts by developers to exploit perceived deficiencies in the drafting to avoid paying overage.  This can be seen from three authorities, one of which was decided very recently. What the cases say First, in Renewal Leeds Ltd v Lowry Properties Ltd [2010] EWHC 2902 (Ch); [2011] PLSCS 22, a charity sold a site in Leeds to a developer. The contract of sale provided that overage was payable “after completion of the final sale of a completed residential unit on the development”. In an attempt to avoid paying overage, the developer failed to complete the construction of the last four houses. It marketed the half-built houses at an overvalue, and, when the seller of the site offered to buy the houses in an attempt to trigger the payment of overage, the developer refused to sell.  Anthony Elleray QC (sitting as a deputy judge) held that it was not open to the developer to act in this way. A term fell to be implied into the contract of sale requiring the developer, if it carried out the development, to build and sell all of the houses. The learned judge made an order requiring the seller to finish the construction of, and then to sell, the houses. Secondly, in Aberdeen City Council v Stewart Milne Group Ltd [2011] UKSC 56; [2011] PLSCS 291, a local authority sold a site to a developer under a contract containing overage provisions. Overage was payable as a share of the profits realised on a sale of the site. Those profits were to be calculated by taking the site’s sale price and deducting certain costs. The developer sold the site to a related company at a price substantially below its market value. If – as the contract seemed to require – any overage fell to be calculated by reference to the sale price, no overage was payable.  The Supreme Court held that overage did not fall to be determined in the manner prescribed by the express terms of the contract. In (what has the appearance of) a striking departure from what the contract seemed to say, the Supreme Court held that a term fell to be implied into the contract that, in the event of a sale of the site which was not at arm’s length, an open-market valuation, rather than the sale price, should be used to calculate any overage.  Lastly, in Sparks v Biden [2017] EWHC 1994 (Ch) Alfred Sparks sold a development site in Wimbledon to a developer to enable him to build some houses on the land. The contract required the developer to pay overage (at one-third of the sale price) on the “sale” of the houses. The contract defined a “sale” as: (i) the sale of the freehold of a house; or (ii) the grant of a long lease of a house. The developer, instead of selling the houses, occupied one of the houses himself and let the remaining houses under assured shorthold tenancies. He claimed to have avoided any obligation to pay overage.  Judge Davis-White QC disagreed. He held that a term fell to be implied into the contract requiring the developer to sell the houses within a reasonable time and made an order requiring the developer to do so. A commercial approach In each of these cases, the courts have been prepared to ensure that aspects of the detail of the drafting did not defeat the central underlying commercial purpose of the overage provisions. Namely that, if the developer realised the development value of the site, it had to share that value with the vendor. Tom Weekes QC is a barrister at Landmark Chambers who successfully represented the vendors in Renewal v Lowry and Sparks v Biden Pic credit: Paul Gillis/REX/Shutterstock