Overage is a high-risk area. The recent high court case of Minerva (Wandsworth) Ltd v Greenland Ram (London) Limited [2017] EWHC 1457 (Ch) highlights some of the practical issues that can beset overage transactions.  

THE FACTS

In December 2013 Minerva (Wandsworth) Ltd (‘Minerva’) obtained planning permission for a large, mixed-use development at the Ram Brewery site in Wandsworth.

As a condition for obtaining planning permission, Minerva had to enter into a section 106 agreement with Wandsworth Borough Council (‘Wandsworth’) which included an obligation to pay an affordable housing contribution of up to an additional £1.2 million if private residential sales receipts were in excess of what was expected.

Shortly before planning permission was obtained, Minerva sold the site to Greenland Ram (London) Limited a subsidiary of Greenland Holding Overseas Investment Company Ltd (‘Greenland’), for £135,735,800. Under the sale agreement, Minerva was to apply for an enhanced planning permission.

If enhanced planning permission was granted then, subject to satisfying certain conditions and provided Wandsworth’s resolution to grant the enhanced planning permission was obtained by 20 October 2014, Greenland would have to pay Minerva an overage payment of £200 per square foot of increased saleable area (net sale area for the residential units and gross internal area for the commercial units).

Before applying for the enhanced planning permission, Minerva had to submit its plans to Greenland for its consent. Greenland’s consent was not to be unreasonably withheld. On 18 July 2014, in the absence of Greenland’s consent, Minerva submitted an enhanced planning application to Wandsworth.

Wandsworth resolved to grant the enhanced planning permission. As a condition Wandsworth required an additional affordable housing contribution of £1.75 million. This required Greenland, as the current owner of the site, to enter into a new section 106 agreement. However, Greenland refused to sign it, resulting in the lapse of Wandsworth’s resolution to grant the enhanced planning permission, and preventing Minerva from earning the overage.

THE DECISION

The judge upheld Minerva’s claim for damages for breach of contract for the sum equivalent to the overage payment Minerva would have earned had the enhanced planning permission been granted.

Valid request for consent

Minerva’s request for consent made by email on 8 July 2014, together with a link to a drop box containing information about the application, was a proper and valid request. The sale agreement was silent on the form in which a request must be made. There was no obligation for Minerva to provide a viability appraisal for the original and enhanced scheme prior to their request for consent. The issue of whether the request was made in accordance with the sale agreement because of Minerva’s alleged breach of its duties to inform and consult Greenland, was not relevant to the validity of the request.

Consent unreasonably withheld

Greenland’s email response on 9 July 2014 was a formal refusal of consent. At common law Greenland could rely on reasons that influenced them at the time they made their decision even though they did not express those factors to Minerva at the time. However, the grounds on which Greenland relied in their email for refusing consent were not reasonable. As consent was unreasonably withheld, Minerva would have been entitled to submit the enhanced planning application after receiving this first refusal.

Reliance on unreasonable refusal not waived

Minerva made a second request for consent in a letter to Greenland dated 11 July 2014. In doing so, Minerva had not waived its right to rely on Greenland’s unreasonable refusal. It was reasonable for Minerva to try again to get Greenland to give their consent; it would not be right to discourage negotiation to resolve differences by penalising Minerva with the loss of their right acquired from Greenland’s unreasonable conduct.

Deemed consent

Greenland’s response on 17 July 2014, that it needed at least four weeks to consider Minerva’s second request for consent, was neither an approval nor a refusal. Under the sale agreement Greenland was deemed to have consented to the making of the enhanced planning application because it failed to make a decision within ten working days.

Breach for refusal to enter into a new section 106 agreement

By refusing to enter into the new section 106 agreement with Wandsworth, Greenland was in breach of the sale agreement. The judge decided that the condition contained in the sale agreement that any new section 106 agreement should be proportionately no more onerous than the original section 106 agreement related to the profitability of the scheme.  After comparing developer appraisals for both schemes, the judge concluded that given the extra profit Greenland could expect to make from the enhanced planning permission, the new section 106 agreement was not proportionately more onerous than the original section 106 agreement. In addition, any alleged breaches of Minerva’s duties to inform and consult were not so as to make the requirement for Greenland to enter into a new section 106 agreement an unreasonable requirement.

Reasonable endeavours

Minerva was not in breach of its obligation under the sale agreement to use reasonable endeavours to minimise the affordable housing contribution required in order to secure the enhanced planning permission. The judge’s approach was an objective one, “what would a reasonable prudent person acting properly in their own commercial interest and applying their minds to their contractual obligation have done to try to obtain the planning permission”. When assessing what steps were reasonable the court must also consider whether any steps would have been successful. Greenland had to show more specific alleged failures than Minerva’s time wasting and failure to leave itself enough time to negotiate properly with Wandsworth.  Minerva’s obligation to use reasonable endeavours had to be seen against the backdrop of a tight deadline set out in the sale agreement to secure Wandsworth’s resolution to grant the enhanced planning permission. It set a limit on how far Greenland could reasonably expect Minerva to prolong negotiating over the level of contribution. There was no evidence that Minerva had mishandled negotiations with Wandsworth or failed to take points available to them.

PRACTICE POINTS

·  If you want to prescribe the form in which a request for consent should be made, include an express provision in the agreement.

· Approach any deemed consent or approval provisions in an agreement with care; don’t get caught out. Make sure your client is aware of any deemed consent or approval provisions, what time period and method for the giving or refusing of consent or approval are specified and explain the consequences of a failure to make and communicate a decision within those parameters.

· Endeavours obligations may provide flexibility but will provide a level of uncertainty as to their scope in any given situation. Whilst reasonable endeavours require an objective approach this is balanced against personal factors, including the financial effect on the party subject to the obligation. Fact and evidence will play a crucial part in determining whether a party has used reasonable endeavours. Only use the term reasonable endeavours advisedly. Consider making the obligation absolute, or if limited, specify the limits.