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15 August 2018 0 Comments
Posted in Opinion, Real Estate

Property development overage – another cautionary tale

Posted by , Partner

Overage is a common method for sellers to realise increased value for their land where, for example, a planning permission is subsequently obtained for development of the land. Properly drafted, an overage agreement can work for both parties by maximising value for the seller and de-risking potential overpayment by the buyer. However, it is vital that the agreement is clear as to what overage will be payable, on what basis and when. Mistakes can be costly!

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What if…?

Imagine a fairly typical scenario where a developer agrees to pay overage to a seller if permission is subsequently obtained to convert existing offices into flats. The developer obtains the permission but there’s a twist: it transpires that the property cannot be redeveloped as intended because the proposed scheme would breach building regulations. It makes sense, does it not, that the overage is not payable as the flats cannot be developed as envisaged?

The case

In London & Ilford Ltd v Sovereign Property Holdings Ltd 2018 (EWCA Civ 1618), the Court of Appeal was asked to decide on just that situation. London & Ilford Ltd (“L&I”) bought a property from Sovereign Property Holdings Ltd (“Sovereign”) and agreed to pay Sovereign an additional £750,000 if L&I obtained approval from the planning authority under the General Permitted Development Order for the redevelopment of the property for a minimum of 60 flats for sale or letting.

L&I obtained the approval, but it subsequently transpired that construction of the flats would contravene building regulations because of an issue with fire escape provisions at the property. L&I argued that the agreed overage payment was not payable as the flats needed to be able to be built, or at least be capable of being built without breaching building regulations. If they could not be built, they could not be available for sale or letting and thus the overage payment was not triggered.

The court disagreed. It held that the overage agreement was very clear and solely concerned with change of use from existing offices to residential. There was no mention in the agreement of compliance with building regulations or any other requirement that needed to be satisfied before the flats could be built and sold or let. If it had been intended that overage payment was only payable if the approval was capable of being implemented, the parties would have said so in the agreement. This view was, in the court’s opinion, supported by both parties being experienced developers and having been professionally advised.

All about the detail

This is another case which reaffirms that “the devil is in the detail” with overage agreements and the parties should be very clear as to what they intend. Here, it is perfectly plausible that L&I had never intended to pay the additional £750,000 if it could not realise the value of the approval (indeed, why would it?) but, regrettably, the agreement did not say that.

The case goes to show that the courts are reluctant to imply provisions into agreements (overage or otherwise) where the agreements are unambiguous, even though the clarity does not necessarily reflect the intention of the parties.

Overage is a relatively simple concept, but drafting the agreement is notoriously technical and foreseeing/avoiding the likely issues requires expertise and experience. In this scenario, L&I would have been helped had the agreement provided that the permission to develop must have been capable of being implemented, the £750,000 was only payable following construction of the flats or (better still for L&I) upon their sale.

Whether you are an experienced investor/developer or dealing with a development site for the first time, we are here to help. Contact our specialist Real Estate team for advice on:

0800 923 2065     Email uscommprop.enquiries@roydswithyking.com

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