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Contract

11/10/2017

The Law of Overages – don’t leave the drafting down to chance

It’s no secret that developing land is often a good way to increase its value; however, not every landowner has the expertise or the finance to carry develop themselves. A developer with this expertise and money is able to buy the land cheaply, carry out the works and sell individual developed units for a significant profit. Landowners may feel they are getting a raw deal in these circumstances; however, there is no need to take on the project in order to benefit from this uplift in value.

What is an overage agreement?

An overage agreement requires a developer to make a payment to the original landowner if they secure the grant of planning permission or development on the land within a pre-agreed time period. The landowner can incorporate an overage into a wider deal with a developer, enabling the landowner to claw back some of the increase in value as a result of the development.

The terms of the agreement are a matter for negotiation between the parties, and the agreement can be as complex or straightforward as the parties wish to make it. Provisions can be included to cover situations where only part of the land is developed, and the parties can agree that the overage provisions will not apply to certain transactions or in certain situations. Although flexible, the overage payment will usually be a percentage of the increase in value of the land as a result of the planning permission or development, and will usually be payable following the subsequent sale of the land. However, whatever has been negotiated, it is important that the agreement is drafted to reflect this.

Sparks v Biden

The importance of a carefully drafted agreement was highlighted in the recent case of Sparks v Biden. Mr Sparks owned a bare piece of land and agreed with Mr Biden that if Mr Biden was able to obtain planning permission to develop the land, Mr Biden could purchase the land to do so. Mr Biden successfully obtained planning permission for 8 houses, and purchased the land from Mr Sparks.

As part of the deal, Mr Biden entered into an overage agreement, whereby Mr Biden would make a payment to Mr Sparks following the sale of the houses he had built on the land. Mr Sparks had assumed that Mr Biden would want to sell the houses as soon as possible after they had been constructed, and there was no clause in the agreement which required Mr Biden to market and sell the properties after completing their construction.

In an attempt to avoid paying Mr Sparks, Mr Biden moved into one of the houses himself and let the remaining properties on short term rental arrangements. Mr Biden argued that he did not have to pay the overage amount as he had not sold the houses, and that he could delay making the overage payment for as long as he liked, until he eventually sold the houses.

As the terms were missing from the agreement, Mr Sparks had no choice other than to take Mr Biden to court to get his overage payment. He argued that Mr Biden should be required to market and sell the properties within a “reasonable time” of completing them. Whilst the court is often reluctant to interfere with the terms of a heavily negotiated agreement, in this instance the court agreed with Mr Sparks. It stated that the arrangement did not make business sense unless Mr Biden was required to sell the properties once constructed.

Lessons to take away

Although the court stepped in to correct the omission in this case, had the agreement been better drafted, the parties could have avoided court altogether.

It can be difficult to predict the future, but care should be taken to consider how the parties’ circumstances may change over the life of the agreement, and the agreement should be drafted to take this into account. As well as saving the time and money of court proceedings, a properly negotiated arrangement also provides certainty for the parties.

If you would like some assistance in negotiating an overage agreement as part of a wider deal, or if you have an existing agreement upon which you would like advice, please contact scott.smith@howespercival.com or another member of our commercial property team.

© Howes Percival LLP