Overage payments are a common feature of the sale of residential development land. The idea is that the seller gets a share in any uplift in the value of the land realised by the buyer, once it has developed the land and sold the units on it.

Overage payments can be very substantial and the sale contract will contain various restrictions to protect the seller’s right to overage.

A typical restriction is that the buyer cannot dispose of the land (or any part of it) without first entering into a deed that will effectively pass on the overage obligations to the new buyer.

Of course, such a restriction should not apply to every disposal of the land, and in particular:

  1. the sale of individual units on the open market to individual purchasers; and
  2. “permitted disposals” – e.g. the transfers of land for “community” purposes such as public open space, utilities and roads.

But what about transfers of affordable housing to registered social landlords? Should these be caught by the restrictions on disposal? This was a question recently discussed by the Court of Appeal [1].

The seller, Burrows, sold some residential development land with the benefit of planning permission, to the buyer (Ward). The sale contract contained the usual overage provisions entitling Burrows to a 30% share in any uplift in the value of the land realised by Ward.

The sale contract contained the usual restrictions on disposal, preventing Ward from disposing of the land (or any part of it) without requiring the new buyer to enter into a deed of covenant obliging it to observe the overage provisions.

The sale contract excluded two broad types of disposal from these requirements:

  1. the sale of individual Market Units on the open market at arm’s length; and
  2. a “Permitted Disposal”, one of which was the transfer/dedication/lease of land for the site of various utilities, or for roads, footpaths or Public Open Space or “other social / community purposes”.

Ward obtained a new planning permission for the site with an increased number of units, but with a new requirement to provide 5 affordable units to a registered social landlord. When it had developed out the site, Ward approached Burrows about selling the 5 affordable units to a registered social landlord. Burrows did not immediately agree, and Ward lost patience and sold the 5 affordable units to a registered social landlord, Amicus.

Burrows then sued Ward for breach of contract, arguing that Ward should have required Amicus to enter into a Deed of Covenant requiring it to observe the overage provisions.

In the absence of a particular provision providing for disposal of affordable units to a registered social landlord, Ward argued that the sale of the 5 affordable units was a Permitted Disposal, because the sale was a “transfer of land for … other social / community purposes”, arguing that affordable housing was for social or community purpose.

At first instance, Ward succeeded in its argument. However, the Court of Appeal reversed the decision. Although it agreed that affordable housing was “other social / community purposes”, it did not agree that a transfer of residential units fell within the definition of Permitted Disposal which was “the transfer / dedication / lease of land for the site of an electricity sub-station, gas governor, kiosk, pumping station and the like or for roads, footpaths, open space or other social / community purposes”. It considered that the transfer of units could not be described as “a transfer of land” in these circumstances, particularly given the other types of transfer itemised in the definition.

Damages / Compensation

The Court of Appeal therefore found that Ward was in breach of the sale contract. But this could well have been a hollow victory, because damages for such a breach of contract would usually be the amount that Burrows would have received had Amicus had to pay overage. However, given that this was affordable housing, no overage would actually have become payable.

Fortunately for Burrows, the story did not end there. In some circumstances, damages can be awarded on what is known as the “negotiating basis”. The Court will award such damages where a party could have applied for an injunction preventing the breach of contract. Since an injunction is such a draconian remedy, the Court can instead award an amount that reflects what the parties would have negotiated for the release of the restriction. In other words, the sum that Ward would have paid Burrows to release it from the restriction on disposals when it wanted to sell the affordable housing.

Conclusion

Now that the provision of affordable housing is a common planning requirement in residential development, the parties to a sale contract should make express provision as to whether the sale of affordable housing falls outside restrictions on disposal. They cannot rely on it falling within more general “permitted disposal” definitions such as “transfers of land for social / community purposes”.

It is also important to realise that just because the disposal wouldn’t have triggered an overage payment, doesn’t mean that the seller will not recover damages. Rather, it will be entitled to the sum that the parties would have negotiated for a release of the restriction. This is particularly galling for a buyer, because it will end up paying money for a sale that would never have triggered an overage payment.