A recent High Court judgment has given a timely reminder on the law concerning implying terms on the basis of necessity, particularly in respect of ‘Overage Agreements’.

It is well established that terms can be implied into express written agreements where it is necessary to do so in order to make the agreement effective. The bar is intentionally set high in such cases. The 2017 case of Sparks v Biden offers a good example of how and when that bar can be cleared.

The Background Facts

By a written agreement Mr Sparks granted Mr Biden an option to purchase land in Wimbledon, Southwest London. Mr Biden exercised that right in 2008 and purchased the land for a sum of £500,000.

The agreement in question also provided for “overage” i.e. the payment of further sums by Mr Biden to Mr Sparks upon a specified trigger event. The sums that would be payable by Mr Biden should this ‘trigger’ occur were significant, and in excess of the original purchase price.

The land had the benefit of planning permission for the construction of eight houses. Accordingly it was agreed the ‘trigger’ would be the sale of any of the eight houses, with the overage payable by Mr Biden being calculated as a percentage of the sale price of each of the properties sold.

So far so normal.

Unfortunately the parties failed to expressly state in the agreement whether or not Mr Biden actually had to sell the properties once they were constructed. Ordinarily such an agreement would have, for instance, an express term requiring the party in question to market the properties for sale upon completion of the development.

Mr Biden elected not to sell any of the eight properties. Instead he moved into one of them himself and rented out the seven on ASTs.

The Court Case

Mr Sparks issued court proceedings. The basis of his claim was that the court should imply a term into the written agreement, on the basis of the principle of “necessity”, requiring Mr Biden to sell the properties “as soon as reasonably practicable” or “within a reasonable period of time”.

The thrust of the arguments made by Mr Sparks’ legal team were that the court should imply a term on the basis that:

  • Without such a term, the agreement lacks any “commercial coherence” and the agreement would not, in fact, be an “overage agreement” without such a term;
  • The fact there was an obligation on Mr Biden to build the houses makes it clear the parties knew the intention was also that he would have to sell them promptly; and
  • Plainly Mr Sparks would not have agreed to sell the land for just £500,000 and he clearly intended to generate further income from the sale.

Mr Biden’s legal team however argued, amongst other matters:

  • There are numerous practical reasons why a term need not be implied in order to “make the agreement work” and that as a result the court could not imply a term on the basis of necessity; and
  • The fact Mr Sparks himself could not say within what timeframe the properties had to be sold was further evidence that a term could not be implied with sufficient certainty.

The Law

It is well settled that in order to imply a term by necessity, the following conditions must be met:

  1. It must be necessary to imply a term to give “business efficacy” to the contract; no term will be implied if the contract is effective without it;
  2. The term must be “so obvious that it goes without saying”;
  3. That term must be capable of being expressed with sufficient clarity; and
  4. It must not contradict any express term of the contract.

It is also well established that the court will not imply terms simply because it would be “fair” or desirable to do so, nor because one of the parties intended to include that term but failed to do so. Similarly terms will not be implied merely because the agreement in question is ‘better’ or clearer as a result. What the parties would or might have done if the clause had been discussed will also not, in itself, be enough to allow a court to imply a term.

The Decision

Having considered all of the relevant authorities and arguments put before it, the court published a pleasingly short judgment on the key issue of whether or not it could imply a term as argued by Mr Sparks.

In just a single paragraph of the judgment the court found such a term did have to be implied, because without it the agreement lacked any practical (or commercial) coherence, adding that the term is “so obvious that it goes without saying”.

Conclusion

Whilst in this particular case most people will feel that ‘common sense prevailed’ that is not always the case. The courts are restricted in what terms they can – and cannot – imply into contracts and there will be plenty of cases where the “common sense test” will not be enough to save a party that has failed to expressly include something within a written (or oral) agreement.

Even though he won the case, no doubt Mr Sparks would much have preferred the clause to have been expressly included in the first place!

For any advice in relation to such matters please contact our Property Dispute Team or our Property Team, both of whom have significant experience in drafting and advising on overage agreements. The proper drafting of such documents will always be money well spent, something Mr Sparks would no doubt testify to.

Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.

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