Overage is a notoriously tricky thing to get right. What can seem to be straightforward commercial principles, agreed without difficulty or acrimony, can be highly difficult to capture legally. A couple of recent cases have demonstrated this, and the importance of being clear about what is being agreed.
Overage for beginners
Overage is a right for a seller of land to a further payment in addition to the price following a sale, on the occurrence of a defined trigger event. It shares the benefit of any uplift in value (or protects a seller against a sharp buyer "making a turn"). The two most common types are:
- Planning overage, where the trigger is (generally) the grant or implementation of a planning permission meeting certain criteria. For example, a price may have been agreed one the basis 100 units can be built. If the buyer gets consent for 120, it would want a share of that extra value
- Sales overage, where the trigger is an onwards disposal or disposals, possibly over a certain level
The complexity stems partly from competing imperatives: the buyer wants to be able to deal with its land with a degree of freedom, to develop it and realise a reasonable return on its investment, while the seller generally wants the highest possible level of protection for its right to a payment, whether because there is a real prospect of a further return, or simply as an "anti-embarrassment" measure.
In unvarnished terms, a lot of it comes down to how much the parties trust each other. But partly, it is simply because there are so many issues for the parties and their advisers to consider. Essentially, overage relates to uncertain future events, so the careful solicitor must try to anticipate every eventuality, and "expect the unexpected".
Questions when considering a planning overage:
- What period should the overage endure for?
- What will trigger a payment? Is it payable on the grant of planning permission, or implementation, or even at some other stage?
- Does it bite on any planning permission, or only planning permission for something specific?
- What if the buyer obtains planning permission, and simply waits for the overage period to end?
- Should there be a positive obligation on the buyer to actually go and get planning permission, and deliver the development?
- What if (as has happened in the author's experience) the local planning authority grants planning permission for something other than what was applied for (a mistake in the officer's report to committee meaning there was no affordable housing requirement, since you ask)?
Two recent cases highlight the importance of thinking through very carefully what you want to achieve, and whether the drafting achieves this.
Is something so obvious it goes without saying?
In Sparks v Biden, the seller granted the buyer an option, exercisable on the grant of a satisfactory planning permission for eight dwellings. There was an "all reasonable endeavours" obligation to gain planning permission, and the buyer was then to build "as soon as practicable". The price was £500,000, plus overage on the sale of each dwelling. Seems straightforward, doesn't it? What could go wrong?
Well, the buyer complied strictly with the express terms of the agreement. He got planning permission, and built the dwellings. Then he occupied one as his home, and let the others on assured shorthold tenancies, so there was no disposal under the agreement, something he argued he was perfectly within his rights to do.
One might admire his chutzpah. Unsurprisingly, the seller did not. It argued there was an implied term that the buyer had to sell within a reasonable period.
The High Court agreed. To presumably hefty sighs of relief from the seller's solicitors, the court ruled that the buyer's interpretation undermined the agreement as a whole. The obligations to obtain planning and build were aimed at realising a return for the seller as soon as possible, and without it, the agreement was commercially incoherent. The buyer was ordered to sell the units.
Social housing as a social purpose
There was a similar issue in the second case, Burrows v Ward. The seller sold to a developer with planning permission for 62 units. Overage bit if the developer sold units at a price above a set level per square meter, but this did not apply to permitted disposals, which included arm's length residential sales, and disposals of land for utilities, as public open space or "other social/community purposes".
The developer obtained revised planning, which required a housing association to take five units, which it did. The developer treated this as a residential permitted disposal; the seller disagreed.
At first instance the judge agreed this could not be a permitted disposal, as it had not been made on the open market, but held it constituted a "social/ community purpose".
This was overturned on appeal. Completed dwellings could not be "land", within the permitted disposal definition, given the nature of the other exemptions within that definition (e.g. sub-stations, highway, open space). The developer should have negotiated with the seller, paying for release of the obligation if necessary.
The moral of the story
Overage is complicated. Words have multiple meanings, and people don't act like they're supposed to. Ask yourself "What's the least attractive way I could interpret this wording?". You may be surprised. The courts may assist, but why count on it?
