Case law has determined rules for implying terms into commercial agreements. Darren Millis, Commercial Property Partner highlights a recent case which demonstrates the issue with implying terms into overage agreements.
The established rule is that a term can only be implied into a contract where it is :
- necessary for business efficacy ;
- so obvious that a reasonable bystander would have no hesitation in implying the term ;
- non-contradictory to the remainder of the agreement and can be clearly expressed.
Overage (commonly known as clawback) allows a seller of land to come back for a second (and sometimes multiple) payment where certain conditions are met. This will be the case where the seller expects or even anticipates that there might be an uplift of the value achieved in the future and the seller does not want to miss out on that uplift.
The recent High Court decision in Sparks v Biden demonstrated how the established rules for implying a term into a contract can be operated when dealing with an overage agreement. In this case the terms of an option agreement allowed the seller to obtain a clawback payment after (1) exercise of the option by the buyer, and (2) after completion of the construction and sale of the new homes by the buyer. The buyer then constructed but then did not sell the new homes. The seller argued that there should be an implied term in the overage agreement that the buyer would market and sell the new homes as soon as reasonably practicable. The court agreed and stated that this was a matter of “business efficacy” in that without this implied term the overage agreement had no worth and was, frankly, pointless.
Overage is, by its very nature, complex. It is important that both parties work through the agreement and do not assume a commercial outcome or that the other party will work to a logical outcome. The court in Sparks v Biden assisted the original seller but the court is not under an obligation to do so.