What is overage?
Overage is a mechanism that gives a seller of land an opportunity to share in the uplift in value of land following a grant and implementation of planning permission, or to take advantage of the value provided by section 106 contributions from a planning permission. This simple concept hides potentially complex calculations and generates many potential traps for sellers and buyers alike. It is not surprising therefore that overage agreements are a fertile source of litigation. To help you avoid the main elephant traps, we have highlighted some recent examples below.
No crystal balls
Overage is contingent on the occurrence of a future event which may not happen, or it may be sabotaged by unforeseen circumstances (including, in one case, an Act of Parliament). The seller and buyer must try to cover all possible eventualities but these will increase in proportion to the complexity of the overage terms and the length of the overage period, ultimately becoming impossible to predict.
The more complex the overage arrangements and the longer the overage period, the greater the likelihood that things will go wrong, so simplicity is key.
You need to decide whether the occurrence of the first overage trigger event will end the overage scheme, or whether it will run for the whole of the overage period.
Seller’s Trap 1: If there is only one overage trigger, the buyer may be tempted to apply for a permission that results in a minimal overage payment.
Ideally, the seller wants any planning permission granted during a specified overage period to trigger payment. If the buyer resists, the seller should impose obligations requiring the buyer to maximise the uplift in value arising out of the first planning permission and generally to act in good faith.
Planning permission as trigger
Be clear about what types of planning permission will trigger an overage payment.
In Loxleigh Investments Ltd v Dartford Borough Council , the overage trigger was a ‘detailed planning permission’, a term not defined in planning legislation. The buyer argued that this did not include approval of reserved matters. The court ruled that the term extended to approvals and permissions granted pursuant to outline planning permissions. However, an express definition in the overage agreement could have avoided litigation.
Seller’s Trap 2: If outline planning permission is included as a trigger, ensure that it expressly extends to approval of reserved matters and full planning permission.
Great care is needed when defining the type of planning use that will trigger payment. There is a fine balance between a use that is overly wide and one that is too restrictive.
Seller’s Trap 3: The definition of planning permission should also include deemed consents arising out of permitted development rights and (in certain circumstances) grants of certificates of lawful use and development.
Implementation of permission
There have been a couple of cases where the buyer obtained planning permission but could not implement it for technical reasons, and yet still had to pay overage. In one case , the development could not be built because of varying ground levels and in another, the development would have contravened building regulations.
Buyer’s Trap 1: Any planning permission which triggers overage must be capable of implementation.
For this reason, in addition to conserving cash flow, developers generally prefer a trigger that occurs later in the development process.
Buyer’s Tip: Try to link the overage payment to the date of disposal of the developed property.
Disposal as trigger
The parties should agree:
- Types of disposal that will trigger overage. Long leases as well as freehold sales are typically included, but also consider the disposal of shares in a property-rich SPV.
- Types of disposal that can be disregarded because they do not increase value, e.g. disposals to utility companies, public bodies and registered providers of social housing; financial charges and short-term leases.
- How to deal with disposals at an undervalue.
Excluding short-term tenancies from overage used to be fairly standard practice but sellers may want to reconsider on smaller developments, following a case last year where a developer tried to avoid payment by occupying one of the developed homes himself and granting assured shorthold tenancies of the other seven.
Seller’s Trap 4: Where sale of the developed property is the trigger, impose an obligation on the buyer to market and sell the property as soon as reasonably practicable.
The more complicated the formula, the greater the chance of a dispute about its application.
In Chartbrook Limited v Persimmon Homes Limited , litigation went all the way to the House of Lords over the positioning of the brackets in a mathematical equation, which resulted in a difference of £3.7 million in the amounts claimed by the parties.
Both parties: Test the formula for peace of mind. If the results are unexpected, revisit the formula.
In Gaia Ventures Ltd v Abbeygate Helical (Leisure Plaza) Ltd , a developer agreed to pay overage on obtaining an acceptable planning permission and to use reasonable endeavours to satisfy a land assembly condition ‘as soon as reasonably practicable’. The conditions leading to the overage trigger were met four days after the expiry of a ten year overage period.
The court found that the developer had deliberately slowed matters down to allow time to run out, breaching its obligation to use reasonable endeavours, a duty that impliedly requires the party under the obligation not to make the objective more difficult to achieve.
A duty to use reasonable endeavours generally allows the duty holder to take some account of its own commercial considerations. From a developer’s perspective, not having to pay overage is undeniably a commercial consideration, but one that undermines the whole purpose of an overage agreement.
As the judge in this case observed, “How hard do you have to work to make yourself liable to pay £1.4 million?”
Buyer: The courts take a dim view of attempts to circumvent the underlying purpose of a commercial contract and are prepared to imply terms to fulfil the parties’ objectives.
Seller: There are always risks associated with overage. If these concern you, you may prefer to renegotiate the purchase price.
For more information about negotiating and drafting overage agreements, please contact Mark Davies or Deborah Caldwell.
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