Sellers who seek to impose overage need to think carefully about the obligations they need and the trigger they choose.
There are a wide variety of trigger events commonly used in overage agreements. Common triggers include:
- the grant or implementation of planning permission or disposal with the benefit of a planning permission;
- practical completion of a development (or some other measure of development);
- disposal of built units including lettings beyond an agreed threshold of units or floor space; and
- sale proceeds or rental income exceeding an agreed threshold.
In the 2010 case of Renewal Leeds Limited v Lowry Properties Limited the court reviewed an overage agreement which was triggered by the sale of the last residential unit on a development.
Renewal Leeds sold land for residential development under a contract conditional upon planning permission. Overage would be paid on revenues above a threshold of £7.4 million upon the trigger of “the final sale of a Completed Residential Unit”.
Lowry obtained planning permission and built 84 houses. 80 houses were sold for a total of £9.6 million but Lowry had not sold the last four houses and the overage contained no obligation on Lowry to build or sell the units.
The remaining four houses were on the market at around 126 per cent of the market price and, in an attempt to activate the overage trigger, Renewal Leeds offered to buy them at the overvalued price. These offers were rejected and the matter ended up in court.
Renewal Leeds argued that it was an implicit obligation that Lowry build and sell as soon as reasonably practicable and to sell at the best price reasonably obtainable.
Lowry pointed to the absence of any build-out obligation and to their right to buy and bank the site (waiving the planning condition) without triggering overage.
The court held for Renewal Leeds and said it was implicit in the agreement that once planning was obtained and development commenced Lowry would not frustrate the commercial purpose of the overage and would complete the development and sell the units.
Although Renewal Leeds’ overage was saved by the Court’s willingness to imply a build-out and sell obligation, the weakness of the overage agreement serves as a strong reminder that sellers who seek to impose overage need to get it right.