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Derek Ching
Derek Ching,
PARTNER
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Overage Clauses – absence of consistency leaves developers and landowners unsure of their position
21 November 2017

Overage is a legal and procedural minefield so we make no apology for this note being longer than normal.


Two recent cases concerning disputes over the operation of overage clauses serve to demonstrate how particularly complex such arrangements are and the extent to which, even carefully drafted agreements, loopholes can appear which favour one party or another. More importantly the approach adopted by the Courts from case to case is inconsistent, making it impossible to predict the outcome of any particular dispute. The message must be to treat the drafting of such provisions with extreme care.


In the High Court case of Sparks v Biden (see our previous briefing (6 October 2017) the Court inserted a term requiring a developer to sell new homes within a reasonable period in order to make a sales overage “work”. This invoked the principle that a term could be implied into the relevant agreement where it was necessary to give effect and practical coherence to the contractual arrangements and was therefore its insertion by the Court was a matter of business efficacy.


This decision came as a huge relief to the landowner (and to their solicitors) as both parties to the transaction had been advised by independent solicitors and to some extent the landowner must count himself as lucky that he was able to take the benefit of the overage arrangements despite the absence of any particular timetable for this disposal of the new properties.


His solicitors could have

  • ensured that overage payments were triggered not only on the sale of the freehold or long leasehold interest in the property but also upon first occupation of the property or
  • inserted a longstop date at which point, if the properties have not been sold, a deemed sale would have taken place

Either of these would have triggered the overage obligations.


The second case of Burrows Investments Ltd v Ward Homes Ltd relates to the mechanics of making sure that overage obligations are successfully passed on from potential developer to potential developer and not separated from the ownership of the development site.


In order to protect the landowner it is commonplace to require that if the developer subsequently sells on the land or part of it during the overage period then the new owner must enter into a covenant with the former landowner assuming responsibility for the overage arrangements associated with the site (and making sure that any overage then due is paid in full). Disposals are prohibited unless a consent or certificate can be provided verifying either that such procedures have been complied with or that an exemption applies.


An exemption to allow “normal” development activities to happen is often created by saying that such a requirement will not usually apply to a range of “permitted disposals” meaning that no further covenant is needed from persons who benefit from such disposals. This commonly includes the utility suppliers and buyers of newly completed homes.  Self-evidently it is hard to expect overage to be paid on the sale or lease of a substation, the presence of which is necessary to enable the successful development to go ahead. Similarly selling a new home burdened by overage would normally prevent the property from being acceptable as security to lenders and no self-respecting homebuyer would want to inherit the developers commercial liability.


Such a list of “permitted disposals” can be extended to other categories eg land allocated for play areas or balancing ponds or for new roads and also in some cases to the disposal of land for affordable housing.


In this case, the overage clauses contained a list of “permitted disposals” including market sales and “a transfer …of land for the site of an electricity sub-station gas governor kiosk sewage pumping station and the like or for roads footpaths public open space or other social/community purposes”.


The developer obtained a subsequent planning permission which provided for five affordable housing units to be constructed on the site. After inconclusive discussions over securing a release of the overage arrangements the developer went ahead anyway and transferred the five units to a housing association.


The landowner argued that the transfer of the five affordable housing units was in breach of the restriction in the overage agreement against a disposal (other than a permitted disposal) The developer argued that the disposal represented a disposal in the open market at arm’s length (one of the defined permitted disposals) but also argued that the disposal represented The developer argued that the disposal of affordable housing fell within the “social/community purposes” part of the definition of permitted disposal.


The High Court rejected the developer’s first argument. However the High Court did declare that the disposal of the affordable housing units was a transfer of land for “other social/community purposes” reflecting the local need for affordable housing.


On appeal, the Court of Appeal ruled that the developer could not bring the disposal of the affordable housing into the scope of the lengthily worded permitted disposal exemption on the grounds that it fulfilled some “other social/community purposes”. Having regard to the established principle that the meaning of a clause such as that outlined above should be construed in the context of the list of examples contained within it (the “eiusdem generis” rule), the Court of Appeal decided that the disposal of the affordable housing units fell outside  range of infrastructure style disposals contemplated by the clause.


As a result, the disposal to the affordable housing provider was in breach of the restrictions imposed in order to protect the overage arrangements and therefore the developer was liable to the original landowner for such breach, even though no overage payment would have actually arisen.


This decision demonstrated an unwillingness to stretch the meaning of the words or re-write the overage provisions. In contrast to the Sparks v Biden case, where the Court came to the rescue of the party arguing that the document should not be read literally, here the developer, as the aggrieved party, had to face the consequences of inadequate drafting.


As indicated above, those preparing overage agreements need to anticipate all contingencies which could give rise to an increase in value in the land and also the means by which developers or other future owners may successfully exploit such value. The two cases mentioned above show that there is no guarantee that the Courts will come to the aid of a party to an overage agreement where a loophole is identified or the wording accidentally has unexpected adverse effects.

 

For further information on this issue or to discuss how the Development and Housebuilding team can help you please contact Derek Ching or Will Nassau-Lake on [email protected] or [email protected].

Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.

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