Interpreting overage agreements

It is relatively common place when dealing with the sale of properties that have a reasonable prospect of securing future planning permission, for the parties involved to discuss an ‘overage’ (sometimes called a clawback). This enables a seller to take a share of any increase in value.

However, such clauses can be an obstacle for the unwary, as evidenced by a recent Court of Appeal case where the Court scrutinised the drafting of an overage clause after the parties couldn’t agree on its correct interpretation.

In the case of London & Ilford Ltd v Sovereign Property Holdings Ltd, the parties had negotiated and agreed an overage agreement, under which the developer (London) would be required to pay £750,000 to the seller (Sovereign) if a “first trigger event” occurred during the overage period. The first trigger event was defined as being London’s receipt of approval from the Local Planning Authority to develop a minimum of 60 residential units on the Property.

A problem arose, despite the planning authority granting approval, when it transpired that the development could not be lawfully undertaken as there would be inadequate fire escapes in the event of an emergency. In response, Sovereign, issued a demand for payment on the basis that after a strict interpretation, approval had been obtained.

London denied any liability to pay and argued that the purpose of the overage agreement was to provide a commercially valuable benefit in exchange for the payment, and therefore, the approval of the 60 residential units only had any value if they could be lawfully built.

Judgment was granted at first instance in favour of Sovereign, and London appealed. London sought to rely on a provision within the overage which (it believed) effectively meant that the residential properties had to be available for ‘sale or lettings’. Since they could not lawfully be built, they could not be lawfully sold or let out.

The Court of Appeal however did not agree and held that the regime for planning and the regime for building regulations were entirely separate and distinct – not only in their legislation but also in their enforcement. The Court held that the overage agreement made no reference to compliance with building regulation and was focussed solely on planning and change of use, which had been achieved. The Court went further and stated that whilst both parties were experienced developers and had been professionally advised, it was clear that London had been in a position to confirm the viability (and legality) of the scheme before it decided whether or not to proceed.

As such, the developer in this instance had no option but to make the overage payment, despite being left with a property that it could not develop in its intended or preferred way.

What this means for you

The case should serve as a stark reminder that the drafting of overage agreements is a technical exercise that needs expert input at all stages, or else a developer could easily find themselves in a similar situation of having to make a significant payment without being able to develop a site in a preferred way.

The BLM commercial real estate team regularly act for both developers and land owners in relation to all types of development agreements, including overages, and are ideally placed to help navigate this complicated area and assist with any concerns.

Disclaimer: This document does not present a complete or comprehensive statement of the law, nor does it constitute legal advice. It is intended only to highlight issues that may be of interest to clients of BLM. Specialist legal advice should always be sought in any particular case.