27/06/2019

Overage payments and reasonable endeavours – a heady mix!

Drafting overage provisions is not for the faint hearted – they are tricky to get right mainly because it is difficult, if not impossible, to cover all future eventualities.  Disputes about overage are on the rise; despite being willingly entered into at the time, as soon as payment has to be made, the agreement is scrutinised in the hope of finding a loophole in order to avoid paying.

Defining what constitutes “reasonable endeavours” is another area which is a frequent source of litigation, particularly assessing the standards that parties obliged to use reasonable endeavours have to meet.  So what happens when these two issues are combined and overage is dependent on the paying party using their reasonable endeavours to enable the overage to be paid?  Added to the mix, what happens when the paying party is the one with considerable control over when this happens?

This was the situation in the recent Court of Appeal case of Gaia Ventures Ltd v Abbeygate Helical (Leisure Plaza) Ltd [2019] which involved a dispute between the developer (Abbeygate) and the landowner (Gaia) relating to an overage payment of £1.4 million.

Facts of the case

Abbeygate, a joint venture company, purchased a landmark site in Milton Keynes for £1.525 million with the intention of developing the leisure complex and ice rink.  The complicated property deal included an overage provision which required Abbeygate to use “reasonable endeavours” to satisfy a number of conditions “as soon as reasonably practicable” which would lead to the trigger of the overage payment.  The longstop date for the trigger event was 10 years, which meant that if Abbeygate managed to prolong compliance with the conditions, it would no longer have to pay the overage sum.

In effect this is what happened; four days after the 10 year longstop date, the conditions for development were satisfied (and overage was no longer payable) leading to Gaia suing Abbeygate for breach of the overage conditions.  The main question for the High Court was whether Abbeygate had used sufficient reasonable endeavours and had acted as soon as reasonably possible to achieve satisfaction of the relevant conditions.

The judge summed up the issue in a nutshell by saying: “how hard do you have to work to make yourself liable to pay £1.4 million?”

The High Court found that Abbeygate did not work hard enough and found in favour of Gaia and awarded damages in respect of the overage sum.  It was clear that Abbeygate had stalled compliance with the conditions due to funding issues as well as taking deliberate actions to avoid making payment.  The obligation to do something “as soon as reasonably practicable” does not mean “when convenient”, it means as soon as reasonably possible.  From an examination of the evidence, the court held that Abbeygate had not made sufficient effort to comply with the conditions, particularly as compliance or non-compliance was largely under its control.  Abbeygate appealed.

The Court of Appeal dismissing Abbeygate’s appeal agreed with the High Court; it was obvious that Abbeygate had devoted its energies to ensuring that the conditions would be complied with after its obligation to make the overage payment had expired.  The court found that if Abbeygate had used reasonable endeavours to comply with the conditions, it could have done so within the longstop date. 

Practical points

This case clearly demonstrates the difficulties that can arise where too much control is given to the buyer.  Most overage agreements are more even-handed, although there may be perfectly valid reasons why one party has more control over the contractual arrangements than the other.  Generally, the court is not interested in the rationale behind an overage agreement; the court’s role is to objectively construe the clauses when a dispute arises rather than unpicking the deal.

 

Careful thought should always be given to the drafting of the trigger event, with particular focus on whether there is scope for the buyer (usually the developer) to avoid making payment.  This would involve including timescales for compliance of conditions, worked examples for payment; effective mechanisms for registering overage against the property as well as for resolving disputes.

Bevan Brittan has considerable expertise in this area, obtained largely through acting for private and public sector clients, including government and health bodies who rely heavily on overage to fulfil their statutory obligations.  We are able to help clients whether developers or landowners with negotiating and drafting overage provisions as well as advising on how watertight existing overage agreements are.