Boilerplate clauses and implied terms

How essential are your boilerplate clauses? One of the factors the judge considered in Sparks v Biden [2017] EWHC 1994 (Ch) was an ‘entire agreement’ clause. These aim to prevent parties from relying on discussions which are not set out in the document.

The courts do not rush to imply terms into documents, particularly non-standard documents negotiated by parties with the benefit of legal advice. This case considered a seller’s claim for an overage payment following development of land. There are many cases on overage, demonstrating either how difficult overage agreements are to draft, or how keen people are to avoid paying overage, or both.

In this case, Mr Sparks had acquired a site in Wimbledon, London, which he used for his business. As he approached retirement he decided to sell it to a developer, Mr Biden. The deal was that Biden would obtain planning permission for a housing development, exercise an option to buy the land for £600,000 and then pay at least £700,000 overage to Sparks when the houses had been built and sold. The precise amount of overage was calculated according to the sales prices achieved, and the entitlement to overage was secured by a restriction on the title register. The contract contained a timescale for obtaining planning permission using ‘all reasonable endeavours’ and an obligation for the buyer to appeal a planning refusal if counsel felt there was a 75% chance of success. Once planning was obtained, the development was to be built ‘as soon as reasonably practicable’.

Matters proceeded according to plan until the homes were complete. Then Biden moved into one house and rented out the others on assured shorthold tenancies. There was no express term in the contract requiring the developer/buyer to sell the finished homes. Biden did not dispute that overage was due, but claimed he was entitled to delay its payment simply by not selling any homes. The seller felt this fundamentally undermined the working and principles of the agreement: he argued that a term should be implied obliging the buyer to market and sell each house within a time period which was either ‘as soon as reasonably practicable’ or ‘within a reasonable period of time’.

The buyer faced challenges with this argument, and one might feel that the entire agreement clause was the least of his concerns. He had to show, following Marks & Spencer plc v BNP Paribas Securities Services [2015] UKSC 72, that the term should be implied in light of the express terms of the agreement, commercial common sense and the facts known to the parties when the contract was made. Generally, the assumption is that if the contract does not state what is to happen in any given situation then nothing is to happen, because if the parties had intended otherwise they would have stated that in the contract.

In particular, the courts cannot imply a term simply because the judge feels it is fair and reasonable or that the parties would have agreed had it been suggested to them: the clause must be necessary to make sense of the agreement. It is less likely that terms will be implied into negotiated documents than into standard-terms documents: here negotiations had lasted more than 12 months and 13 iterations.

It can be challenging when drafting overage to think of all the ways a determined seller might find to frustrate the drafting. But the ‘not selling’ approach had been tried before and considered in Renewal Leeds Ltd v Lowry Properties Ltd [2010] EWHC 2902 (Ch). In that case overage was due when the last house was sold – the developer did not complete construction of the final four homes. It was decided before Marks & Spencer and against the developer. In this case the judge felt that Renewal Leeds turned on its own facts.

In Sparks, the specific terms in relation to planning permission and building out the development pointed to an agreement to realise the value of the development and (from the seller’s perspective) making sure that overage was paid. Otherwise there was no reason for the drafting to be there, and without such a clause the contract lacked commercial coherence. The houses had to be sold, but when?

In The Interpretation of Contracts Lewison considers that ‘where a contract does not expressly or by necessary implication fix any time for the performance of contractual obligations the law usually implies that it shall be performed within a reasonable time’. Is this too imprecise to be capable of enforcement or certainty? Indeed, was the fact the seller had put forward two alternatives for the clause he wanted implied by necessity to state an indication it was not clear what the parties would have intended?

The judge felt not. The contract should have implied into it a clause that the buyer should be obliged to market and sell each house within a reasonable period of time. This flexibility allows for off-plan sales and the vagaries of the housing market. Litigators may be wondering about the wording of the order. That was referred to the parties to agree before a master.

This case shows the perils involved in drafting an overage agreement. Practitioners should remind themselves of the arguments used in reported cases, and to make sure fees and workloads allow for the work to be done properly. And the entire agreement clause? In the end that was disposed of very briefly. It was felt to be a factor against implying the term sought by the seller, but only a factor, and not a very strong one on the facts of this case.

Suzanne Gill is a partner at Wedlake Bell