News & Insights

Overage Agreements – Recent case law

The recent Court of Appeal decision of London and Ilford Limited v Sovereign Property Holdings Limited [2018] EWCA Civ demonstrates the need for developers to take great care when entering into and negotiating the terms of overage agreements.

“Overage” typically refers to arrangements pursuant to which a buyer is obliged to make a payment to a seller if a specified event (such as the grant of planning permission) occurs following the sale of the property, and within the stated overage period.

In the above case, Lincoln & Ilford Limited (“L & I”), appealed against the decision of the High Court, who had made an order for summary judgment of £750,000 and interest held to be due pursuant to an overage agreement between L & I and the seller, Sovereign Property Holdings Limited (“Sovereign”), in respect of premises in Ilford.

L & I intended to redevelop the office space at the property into residential flats.

L & I had procured prior approval from the local authority under the Town and Country Planning (General Permitted Development) Order 2015 for the development of sixty residential units at the premises.

Sovereign argued that this constituted a trigger event under the agreement, entitling them to the overage payment of £750,000.

The “First Trigger Event” under the overage agreement read:

“the receipt by the Buyer of a Prior Approval in relation to a proposal for the Development relating to a minimum of sixty (60) Residential Units shown on the plans at Annexure 3 or such other similar scheme submitted by the Seller that delivers a minimum of sixty (60) Residential Units at the Property.”

It transpired however that the proposed scheme for residential flats would contravene Building Regulation constraints, and that not all of the 60 flats could be lawfully built.

The Court found in favour of Sovereign, and noted that the trigger events for overage payments under the agreement were clearly and expressly concerned with planning and development consent, with no reference to Building Regulation constraints.

The Court noted that “the regime for planning and development consent and the regime surrounding building regulations are entirely separate in their purpose, legislation and enforcement”, and held that, had it been intended that the trigger event should have required Building Regulation or any other consents to have been granted, the parties (being experienced developers with experienced solicitors) would have spelt this out.

The appeal was dismissed, and L & I were left in the unenviable position of having to make the overage payment notwithstanding that they were unable to undertake the proposed development.

The case highlights the need, as with all commercial agreements, to take great care when negotiating overage agreements, to ensure that the requirements of the parties are accurately reflected.

Overage agreements are complex arrangements, and specialist advice should be sought at an early stage.

For assistance, please contact our commercial property team: