In London and Ilford Ltd v Sovereign Property Holdings Ltd , the Court of Appeal looked at whether an obligation to pay overage was still enforceable - even if the dwellings referred to in the overage agreement couldn’t be built.
Overage is a mechanism that enables a seller to obtain a share in any uplift in value of land after they have sold a property - the overage payment. The buyer is required to make an overage payment to the seller if a trigger event happens, such as the grant of planning permission, or when a developer exceeds a certain amount on their plot sales.
Facts of the case
London and Ilford Ltd purchased a commercial property from Sovereign Property Holdings Ltd with the intention of converting the building into residential flats under permitted development rights. The parties entered into an overage agreement which would trigger a payment of £750,000 to Sovereign Property Holdings Ltd, if London and Ilford Ltd received prior approval from the local planning authority under a permitted development order for a minimum of 60 residential dwellings. London and Ilford Ltd received the prior approval for 60 dwellings they applied for, but were subsequently notified that the construction of the flats would breach building regulations. They would not therefore be able to deliver the 60 flats.
Despite the fact that the flats could not be built, because London and Ilford Ltd had gained their prior approval, Sovereign Property Holdings Ltd claimed its £750,000
London and Ilford Ltd argued that they should not have to pay the overage on the basis that the purpose of an overage agreement was to provide a commercially valuable benefit in exchange for payment, and that prior approval for a change of use was only valuable if the 60 residential units could be lawfully built.
The Court of Appeal said that there was no mention in the overage agreement of compliance with building regulations or any other requirement that might need to be met before the units could be built; if the parties wanted to make this a requirement of the overage agreement, they should have done so at the time. Essentially, London and Ilford Ltd were found to be liable for the overage payment, a situation that could have been avoided had it satisfied itself of the viability of the scheme before entering into the agreement.
What does this mean in practice?
The case highlights once again the issues that arise with overage, and how carefully any trigger event needs to be considered because it is not the court’s role to assist in cases that boil down to a bad bargain being struck.
Buyers and sellers will usually have very different aims when it comes to overage and to avoid problems later on, detailed thought needs to be given at the heads of terms stage to:
• How the overage payment is to be calculated
• What the trigger event going to be
• How long the land be bound by the overage
• How the overage will be secured against the land
• Does the overage bind successors in title?
For more information on this or similar issues, please contact Isabel Alderton-Sell in the Property Development team.