Overage: beware

9 February, 2018
by: Cripps Pemberton Greenish

This week, Development Associate Franco Lambiase explores the recent Court of Appeal case of Burrow Investments Ltd v Ward Homes Ltd [2017] EWCA Civ 1577  highlighting the need for a developer, and its advisers, to be alert to the pitfalls of poorly drafted overage provisions.

What can you do to ensure your overage provisions will withstand the test of time and, possibly, interpretation by the court?

First things first; what is an overage?

Generally, the term ‘overage’ (sometimes ‘clawback’) is used to describe the situation where a seller retains a share in the increase in value in a property that is realised after the property has been sold.

A seller is likely to impose an overage obligation on the buyer in a variety of circumstances.  There may be a reasonable expectation that the property may be redeveloped at some point.  A more valuable planning permission may be granted in the future.  Improved market conditions may mean that sale proceeds generated by plot sales are greater than assumed at point of sale.  The seller may simply want to avoid the embarrassing situation of seeing the property ‘turned’ for a higher price.

An overage payment represents a share of the increased value of, or receipts from, the property after the occurrence of a trigger event, such as the grant of a planning permission, the disposal of the property at a higher price within a fixed period of time, or the disposal of a completed development.

There may be many other instances where an overage payment is triggered, too many to list here.  However, suffice to say that an overage obligation enables a seller to sell at the current value of the property, without having to forego a share in its future potential.

Getting the drafting right

In most instances, overage provisions reflect complex commercial arrangements.  Particular care has to be taken at the drafting stage to ensure that the documentation correctly reflects what has been agreed.

What makes drafting overage provisions particularly tough is having to consider all reasonably foreseeable circumstances in which the overage may or may not become payable.  This can be problematic given the difficulty in predicting future events over what may sometimes be many years.

By way of example, an owner sold a site to a developer who agreed to pay overage within the next 21 years if it:

  1. Bought the land next door; and
  2. Got planning permission for its development; and
  3. Developed it; and
  4. Accessed it through the site.

The developer could avoid paying overage by various means, such as:

  1. buy just part of the land next door;
  2. get planning permission for only part of the site;
  3. ask the neighbour to get the planning permission before buying the site;
  4. get someone else to carry out the development.

Where the express terms of an agreement are unclear, the court may be required to interpret what was intended by the parties to the agreement.  The case of Burrow Investments Ltd v Ward Homes Ltd is a recent example of how drafting can make or break an overage arrangement.

The facts

Burrows Investments (Burrows) sold land to Ward Homes (Ward) with planning permission for residential units.  The parties agreed that Burrows would receive overage if Ward disposed of the units at a price exceeding a certain sum per square foot.

Ward was precluded from making a disposal of the property (other than ‘permitted disposals’) without first procuring that the transferee entered into a deed of covenant with Burrows in respect of the overage.

‘Permitted disposals’ included:

  1. disposals in the open market at arm’s length (i.e. sales to individual purchasers of dwellings);
  2. the transfer/dedication/lease of land for the site of an electricity sub-station, gas governor kiosk, sewage pumping station and the like, or for roads, public open space, or other social/community purposes.

The original planning permission contained no provision for social housing.  Ward subsequently obtained a revised permission for the development, which required Ward to provide five units of affordable housing.  The units were built and sold on to a registered provider of social housing.

Ward claimed that the disposal of the five units to the registered provider was within the definition of permitted disposal under the overage.  Burrows disagreed, arguing that Ward had breached the overage agreement.

The case reached the High Court, which ruled that the disposal to the registered provider was not a disposal within paragraph (a) because it has not been made in the open market.  It held, however, that the provision of affordable housing achieved an important social purpose of substantial benefit to the community, and was therefore caught by paragraph (b).

Burrows successfully appealed.  The Court of Appeal held that any land that was transferred within the remits of paragraph (b) (e.g. for the site of an electricity sub-station etc) would be unlikely to have any buildings on it at the date of transfer – and certainly not dwellings.

It went on to say that the overage agreement included a definition of “Market Units”, being a flat, house, cottage, maisonette, bungalow or any other construction intended for residential use.  Had the parties intended paragraph (b) to include a dwelling house, they could have used the term “Market Units” in paragraph (b).

Properly construed, therefore, a “transfer of land” as referred to in paragraph (b) did not include the transfer of a completed dwelling, and Ward lost.

Conclusion

The reality is overage agreements are usually very specific to the facts of the transaction, which means interpreting what the parties may or may not have meant can be a difficult business – even for the judges.

In the case at hand, changes in planning policy to require on-site provision of affordable housing should have been within the contemplation of the parties prior to entering into the agreement.  The parties could, therefore, have expressly provided for disposals of affordable housing to be a permitted disposal, however no such provision was made.

Careful drafting is required to ensure that the transferee cannot avoid making an overage payment or structure events so that only a token overage payment becomes payable.  All reasonably foreseeable circumstances must be considered so that the overage provisions will remain effective for the whole of the overage period – having a broad overview of what may or may not reasonably change over the course of the overage period (be that from a planning policy or more practical perspective) is essential.

For more information…

If you are a developer, landowner or investor and require any assistance with overage or other property development matters contact  Franco Lambiase at franco.lambiase@crippspg.co.uk or 01892 506199.