Room with a View – The case for overage
20 November 2019
Imposing some sort of overage or clawback provisions into a sale agreement remains a popular device with landowners. Many commercial agents (and a number of local authority sellers) see overage as a way of protecting future land value increases for the benefit of the seller or as a hedge against fluctuating land values.
However, they remain a source of expensive litigation, as three recent cases will help to demonstrate.
How hard do I have to try to make overage happen?1
Our first case all turns on the meaning of the phrase “reasonable endeavours”. In particular, those which a developer had to take under a development agreement which would in turn trigger an overage payment of around £1,400,000. The scheme involved a complex town centre redevelopment, the trigger for the overage payment being subject to two conditions:
- obtaining an “acceptable planning permission”; and
- completing a land assembly exercise in order to deliver the development.
In the end, despite the original expectations of both parties, the land negotiations took much longer than anticipated. So much so, that the developer (Abbeygate) began to realise that the land assembly exercise might not be completed within the ten year period for which the original overage payment would crystallise. When the overage period expired, Abbeygate sought to argue that it had used reasonable endeavours to satisfy the conditions but that it had been prevented from fully complying by funding issues. That in turn meant it should not be liable to pay the overage. The Court of Appeal found that the funding issue was largely of Abbeygate’s own making (by creating a network of interdependent conditional contracts) which had made obtaining funding that much harder for the developer. Therefore, the court found that Abbeygate had not made reasonable endeavours and so the whole of the overage sum became due to the local authority even though the conditions were not met within the period.
What is “detailed planning permission”?2
A favourite phrase of property agents and still one commonly encountered in overage agreements. Unfortunately, it is a phrase which lacks any kind of formal definition, as our next case demonstrates. Here a local authority had been granted outline planning consent for five detached houses before deciding to sell on the site to a developer. The sale agreement imposed an overage obligation, triggered by the grant of “any detailed planning permission…”. The developer went on, first to obtain a reserved matters consent, and subsequently by means of a further application to vary a condition in that reserved matters consent.
The developer tried (ultimately unsuccessfully) to argue that neither of these was a “detailed” planning permission. It pointed out that this term is not defined in the Town and Country Planning Acts. In the end, the court found that both consents fell within a pragmatic interpretation of the phrase “detailed planning permission” and accordingly awarded the local authority overage in accordance with the formula set out in the original sale agreement. At one level this would probably be seen as a victory for common sense – and that developers should not be trying to argue on technicalities when the sense of the contract would seem fairly obvious. Nonetheless, the litigation might have been avoided entirely had the parties (and their advisers) been clearer about what they meant in their agreement, rather than asking a court to determine it for them.
I’ve got planning but I can’t use it.3
If case number two looks like common sense, then our third example shows why you can’t rely on common sense to save you from a bad deal. Here a buyer and seller entered into a contract to sell a mixed use building (comprising offices and retail). The buyer intended to convert the building to residential using permitted development rights, which in this instance only required a prior approval from the local planning authority to a scheme to deliver “a minimum of 60 residential units”. The local planning authority duly issued a prior approval, only for the developer to find that it was unable to complete the scheme as envisaged for fire safety reasons. It could only meet the building regulations requirements for adequate fire escape by not converting a number of units. It then tried to argue that the overage was not triggered since the scheme would not “deliver” the 60 unit minimum. The court disagreed; the trigger related solely to the grant of prior approval, not whether it could be implemented, and so the overage sum fell due. Again a careful consideration of both the triggers for overage, and any related obligation to pay, is necessary to avoid expensive unintended consequences.
Lessons to learn
So what conclusions can we draw from these cases?
- Never make overage the throwaway line at the end of a set of heads of terms. No matter how simple the idea sounds, the execution is invariably complex and expensive (potentially in more ways than one).
- Be clear about exactly what triggers the overage payment, and just as importantly, when it falls due for payment.
- If you are a developer, anticipate that a court is less likely to be sympathetic to attempts to avoid making payments negotiated in open contracts. The court will not look at surrounding circumstances to judge the “fairness” of making the party pay the overage. They will focus on whether the payment has been triggered, and in some circumstances, the efforts (or otherwise) of the party who is obliged to take steps in order to cause a payment to fall due.
This article is from the autumn 2019 issue of Room with a View, our newsletter aimed at professionals within the property industry. To download the latest issue, please visit the newsletter section of our website. Law covered as at November 2019.
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The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at November 2019.