The High Court resorted to implying an omitted term into an agreement in order to give it business efficacy.

Background

In Sparks v Biden, Sparks owned land that was ideal for residential development. He had no experience of developing land and he entered into an agreement with Biden, an experienced developer. Under the agreement, Biden was granted an option to purchase the land. Under the terms of the option, Biden had to apply for and use all reasonable endeavours to obtain planning consent. If the option was exercised and the sale completed, Biden had to proceed as soon as practicable to construct the new houses in accordance with the planning consent.

Planning consent was granted and Biden exercised the option. The initial purchase price was paid and the houses built. On the sale of each of the houses, Sparks was entitled to receive an additional payment - an overage payment - which would be a total minimum sum of £700,000.

The option agreement and the overage provisions were agreed between the parties' solicitors but there was one fundamental omission from the terms. While Biden was obliged to obtain planning consent and, if he exercised the option, to construct the houses, there was no obligation on him to sell the houses once they were completed. Instead of selling the houses, Biden occupied one of them and let the remainder on assured shorthold tenancies. He argued that that he was not obliged to sell them unless and until he, at his discretion, decided to do so. Any obligation to pay the additional payments (the overage) could be delayed indefinitely by simply not selling the houses.

Sparks argued that this interpretation of the option undermined the whole agreement and its underlying purpose. He applied to court for a term to be implied requiring Biden to sell each of the newly constructed houses either 'as soon as reasonably practicable' or 'within a reasonable period of time'.

Implied terms

It is no mean feat to persuade the courts to imply a missing term into a contract. The test it applies is one of necessity, not reasonableness, and it is a strict test. For a contractual term to be implied:

  • it must be reasonable and equitable;
  • it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;
  • it must be so obvious that 'it goes without saying';
  • it must be capable of clear expression, and;
  • it must not contradict any express terms of the contract.

The judge, HHJ Davis-White QC, agreed that a term should be implied into the option agreement to the effect that Biden was under an obligation to market and sell each house within a reasonable time. He concluded that the clause was one that was necessary as a matter of business efficacy and, without it, the option lacked practical or commercial reason. He considered that the clause was so obvious that it went without saying that it should have been included.

Conclusion

There is no guarantee that the courts will intervene and simply imply a term into a contract where the parties have failed to deal with the omitted term. This is a salutary lesson which demonstrates that careful forethought is required as to the terms of the transaction and the possible outcomes of the development process, which can avoid recourse to expensive and time-consuming litigation. Click here for the judgment in Sparks v Biden.

LHS Solicitors can assist with commercial property matters, please feel free to contact us to discuss your options.

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