A recent decision (July 2018) of the Court of Appeal in London and Ilford Ltd v Sovereign Property Holdings Ltd has emphasised how easy it is for overage clauses to have unintended consequences.
An overage agreement, which is designed to generate a further payment to a former landowner if certain specified circumstances occur (usually the grant of further planning permission or the sale of properties for a higher price than expected) does require careful attention to detail both on the part of the seller who wishes to secure the additional payment and the buyer who wishes to know exactly in which circumstances liability may arise and to limit those circumstances if possible.
In this case, the trigger for payment was the grant of planning permission by way of prior approval for the change of use of offices into residential units. What became apparent was that it would be impossible to implement the planning permission because the units within the building would not be able to satisfy Building Regulations when the conversion works were carried out. The developer sought to extricate itself from the overage obligations with various ingenious arguments that the true meaning of the arrangement between the parties was that payment should only be triggered if the planning permission could be implemented in a meaningful way. None of these arguments convinced the Court.
The wording of the overage clause was quite clear that the trigger was the grant of the planning permission (by way of prior approval) and there was no requirement for that planning permission to be capable of practical implementation on any commercial basis. On this basis the High Court had granted the former landowner summary judgement for its claim for the overage payment which was a fixed sum of £750,000. The Court of Appeal saw no reason to change that. So the developer has secured a useless planning permission together with a liability to pay the former landowner £750,000 overage.
This case highlights the need for the extreme care when drafting overage triggers and the requirement for all parties to consider all the factors which might come into play. It would appear that insufficient thought was given to the question of whether the planning permission would be of economic benefit (i.e. capable of being implemented).
In the often limited time available for negotiations over the term of overage, it is easy for parties to agree simplistic Heads of Terms and then to pay insufficient attention to the true implications of that Agreement which may only go part of the way to delivering what the developer needs.
The developer in this case could have protected its position by defining more carefully the trigger for payment of overage by reference to the effectiveness of the planning permission or linking the valuation mechanism to the value generated by the planning permission (which in this case would no doubt have been negligible). Alternatively the developer could have arranged for overage to be payable only if and when the development was carried out (which again may have been never unless the problems with Building Regulations could have been overcome).
This case is another example of the fact that the Courts will be very reluctant to try to reinterpret the meaning of an overage clause in favour of a developer. If on the face of it the terms of an overage clause are clear, then, applying general principles of interpretation, the Courts will not intervene even if the effect of the words is commercially painful for one party. The developer has to suffer the consequences of his inattention to detail. It will be assumed that they have sufficient commercial nous and understanding of all of the issues to have intended the precise meaning which the overage clause bears). Only in cases of genuine ambiguity will the Courts step in to re-interpret a clause in order to give it commercial effect but, even then, Courts seem reluctant to favour the developers over the landowners.
Here, the developer got what he wanted – a planning permission - but probably regrets doing so on this occasion.