Timing is key in relation to overage: Make sure you can build what you are paying for

The recent case of London and Ilford Ltd v Sovereign Property Holdings Ltd [2018] EWCA Civ, is a reminder that overage clauses should to be carefully reviewed.  Following the decision of the Court of Appeal a developer will have to pay overage on a consent that it cannot physically build.

The Case

In the context of property transactions, the term “overage” is used to describe the situation where a seller is to share in any increase in value in a property that is realised after the property has been sold, if a specified condition is satisfied in the future, such as the granting of planning permission.

In this case, London and Ilford Ltd (the “Developer”) purchased a property from Sovereign Property Holdings Limited (the “Seller”) with the intention of redeveloping the office space at the property into residential flats.  The purchase was subject to an overage agreement which required the Developer to pay the Seller the sum of £750,000 if a certain “trigger event” occurred during the overage period. The trigger event was the Developer’s receipt of prior approval from the Local Planning Authority under the Town and Country Planning (General Permitted Development) (England) Order 2015 for the “development of the Property comprising of a change of use … to a use falling within Class C3 (dwelling houses) of the Permitted Development Order.” Unusually, the obligation to obtain the prior approval was that of the Seller, with the Developer approving the plans submitted with the application.  Prior approval was obtained within the overage period and the Seller claimed the sum of £750,000.

However, the Developer was subsequently notified that the proposed construction of the residential flats would be in breach of Building Regulations, due to inconsistencies with fire escape provisions.  So, although prior approval had been obtained, the flats could not actually be constructed due to Building Regulation constraints. The Developer argued that it was not liable to pay the overage as the residential units could not be built and therefore the overage agreement was frustrated. The Developer argued that approval from the Planning Authority was only one of the necessary triggers; stating that Building Regulations consent was also required to proceed with the development.

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 related to the grant of consent by the Local Planning Authority, not Building Regulations consent.

What can we learn

The result of the Court of Appeal’s decision was that the Developer will have to pay an extra sum on the hypothesis that a prior approval has increased the value of land notwithstanding that the prior approval cannot be implemented in the desired way.

The lesson to be learnt from this case is that developers and their legal advisors need to study carefully and prudently check the drafting of an overage agreement, and the trigger events (including their timings) contained in overage agreements before entering into them.  Developers will need to consider whether payments should be on implementation or even practical completion to ensure they only pay for something they can build – a move that sellers are likely to resist.