Overage agreements and endeavours clauses…what could possibly go wrong?

Insights - 13/04/2018

Graham Halsall, a Partner in our Dispute Resolution team discusses the recent cause of Gaia Ventures Limited v Abbeygate Helical (Leisure Plaza) Limited [2018].  This case has highlighted complications that can arise when there are contractual mechanisms such as endeavours clauses and overage agreements in place.

“How hard do you have to work to make yourself liable to pay £1.4 million?”

This was the opening question posed by the Judge in the recent case of Gaia Ventures Limited v Abbeygate Helical (Leisure Plaza) Limited [2018], a case concerned with the operation of an “overage agreement” that was conditional on an “endeavours clause”. The case highlights the difficulties which can arise when parties use these contractual mechanisms when trying to regulate events and behaviour occurring in the future.

Overage agreement

What is an overage agreement? Essentially, it is a contractual obligation on the buyer of land to make a further payment to the seller upon the occurrence of a certain trigger event.
This will generally include actions such as the granting of planning permission on that land or the implementation of pre-granted planning permission. It can also be used to cover situations such as the disposal of the land at a higher price within a prescribed period or the disposal of a completed development.

Drafting an overage agreement can be incredibly technical, especially due to the various commercial factors that need to be taken into account and given the uncertainty of trigger events occurring.

Endeavours clause

The requirement to pay overage is usually contained within an obligation to bring about the occurrence of the trigger event. That is where “endeavours clauses” come in. An endeavours clause is, in effect, an obligation on a party to “try”.

The extent to which the party is required to “try” depends on a number of facts and is often the subject of dispute. Endeavours clauses appear in a variety of different forms and are qualified by a range of different language. For example, “reasonable endeavours” or “best endeavours” are frequently used, but you might also find phrases like “commercially prudent endeavours”. Over the years, general rules have been established and it is fairly well settled that an obligations to use “reasonable endeavours” is less onerous than “best endeavours. However, all of these phrases fall to be construed in the context of the contract as a whole and the facts and circumstances of each case. This can lead to uncertainty in understanding just how much effort the party needs to put in in, so as to achieve the relevant objective.

The decision

In the case of Gaia, the parties were bound by an overage agreement pursuant to which Abbeygate (the developer) was liable to pay Gaia (the seller) the sum of £1.4M upon the fulfilment of certain trigger events. One of those events was the grant of acceptable and commercially viable” planning permission before a 10 year longstop date. In bringing about those events, Abbeygate was required to use “reasonable endeavours”.

Another way of looking at it is that Abbeygate could avoid a £1.4M if it failed to obtain planning permission by the relevant deadline. It just had to show that it had failed by using “reasonable endeavours”.

In the pursuit of achieving the trigger events, it transpired that Abbeygate had entered into “a network of underconditioned agreements” and retained considerable influence over when and in what order those conditions were satisfied. Although this was ultimately sufficient to fulfil the trigger events, satisfaction of the of the conditions did not take place until 4 days after the longstop date (suspiciously some might say). Hence the £1.4M was not payable.

This was challenged by Gaia, who claimed that Abbeygate had deliberately engineered events so as to miss the deadline.

The Court held that Abbeygate had failed to use reasonable endeavours in this case. Ultimately, this meant that Abbeygate were liable to pay the £1.4M plus interest. Nice try!

What this decision shows us is that where an overage clause is drafted in favour of one party, the conduct of that party must fall in line with the intention of the overage clause. It also shows the dangers of drafting overage clauses, including a number of conditions to be fulfilled. When complex clauses which for the most part have conditional realities are drafted, there is an increased risk of litigation.

 

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