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Overage Agreements

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In the recent case of London and Ilford Limited v Sovereign Property Holdings Limited, the Court of Appeal has left a property developer with a bloody nose and a financial headache.   

In the context of a property transaction, the term “overage” refers to the payment that the seller may be entitled to receive after completion of the sale if a specified condition is satisfied in the future, such as for example the grant of planning permission or the construction of more than a specified number of houses.

In the London and Ilford Limited case, the developer purchased a property from Sovereign Property Holdings Limited.   The developer intended to redevelop the office space at the property into residential flats and the purchase was subject to an overage agreement. 

The overage agreement required the developer to pay Sovereign Property Holdings Limited the sum of £750,000 if a “trigger event” occurred during the overage period. 

The trigger event was defined in the overage agreement as being the receipt of approval from the Local Planning Authority for the development of the residential flats.

The developer duly applied for and obtained approval from the Local Planning Authority, and this was obtained during the overage period. 

However, the developer was subsequently notified that the proposed construction of the residential flats would contravene Building Regulations due to incompatibility with fire escape provisions.  In other words, although planning approval had been obtained, the flats could not actually be constructed due to Building Regulation constraints. 

So the question was this: had the entitlement to overage actually been triggered?  Sovereign Property Holdings claimed that the trigger event had occurred.  The overage agreement simply referred to the receipt of prior approval from the local planning authority.  That approval had been given. The overage agreement made no reference to Building Regulations nor to the actual feasibility of the construction itself. All that was required was for the Planning Authority to issue approval. That had been done.  It all seemed pretty simple to Sovereign Property Holdings and they therefore claimed payment of the sum of £750,000. 

The developer denied that it was liable to pay the overage arguing that if the residential units could not actually be built, the overage agreement was frustrated. Approval from the Planning Authority was only one part of the equation; they also needed Building Regulations consent in order to proceed with the work and to realise any profit.

The Court at first instance agreed with Sovereign Property Holdings and ordered the developer to pay the overage sum to Sovereign.  The developer appealed to the Court of Appeal.  The Court of Appeal dismissed the appeal.

The Court of Appeal held that the regime for planning consent and the regime surrounding Building Regulations consent were entirely separate.  The trigger event was clearly defined in the overage agreement and it concerned the grant of consent by the Local Planning Authority.  There was no mention of Building Regulations consent.  If it had been intended that the overage entitlement would only be triggered once Building Regulations consent had been obtained, then the parties could and should have made express reference to that in the agreement.  Both parties were experienced developers and had been professionally advised. It was not the Court’s role to re-draft commercial agreements. 

The result of the Court of Appeal’s decision was that the developer was left in the unsatisfactory position of having to make an overage payment despite not being able to develop the property in the intended way. 

The fairly stark and obvious lesson from this case is that developers and their advisors need to study carefully the trigger events contained in overage agreements and to be aware of the Court’s narrow (and some would say common sense) interpretation of these defined trigger events.  One option is to define the trigger event by reference to the implementation of planning permission, or to define the trigger event by reference to the actual disposal of the completed residential units. 

If you have any questions in relation to the issues raised in this update, please contact Andrew Turner at aet@hughes-paddison.co.uk.

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