Andrew Tugwell looks at how parties can contest overage obligations
Today’s garage might be tomorrow’s skyscraper, so little wonder overage payments are popular. You might be forgiven for thinking that an overage provision would be straightforward, but uplifts are often hotly contested, especially those with big numbers. It is reported that Delancey is suing the state-owned Chinese company Greenland alleging non-payment of an overage obligation following efforts to enhance a planning permission for 661 homes including a 36-storey tower in Wandsworth. So, what might a party do to escape liability?
Say it’s unfair
The courts can interfere with bad bargains and unreasonable terms. For example, in Mortgage Express v Lambert [2016] EWCA Civ 555; [2016] EGLR 41 the judges set aside a transaction with a vulnerable and naive seller for £30,000 when the property was worth £120,000. Integrity can apply to big businesses too; in Connolly Ltd v Bellway Homes Ltd [2007] EWHC 895 (Ch) the developer buyer represented that £210 per sq ft was a genuine estimate of the average achievable sale price of flats without an honest belief and so was held liable for the tort of deceit.
Do nothing
A party might try to avoid obligations to create value. In Ross River Ltd and another v Cambridge City Football Club Ltd [2007] EWHC 2115 (Ch), however, the court held that if an agreement provides for steps to be taken serving the parties’ joint interest, then a party may breach its duty of good faith if it does not obtain the best form of planning permission possible.
Don’t put it in writing
It is surprising that some of the biggest deals are concluded following an “understanding” over lunch. In Cobbe v Yeoman’s Row Management Ltd and another [2008] UKHL 55; [2008] 3 EGLR 31, it did not matter that the claimant had engaged in significant effort in obtaining planning permission towards an unwritten overage agreement. The House of Lords decided that as the parties were commercially sophisticated there could be no proprietary estoppel because the claimant knew he did not have an enforceable contract, although some financial compensation was awarded for the time spent.
Contest the interpretation
The court can correct a contract that flouts business common sense. It can accept that words used mean something different to what they appear to mean in isolation and will consider what a reasonable person would understand, taking into account what the parties knew at the time (Investors’ Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896). However, the court will not usually take into account evidence of prior negotiations between the parties, but can consider evidence of discussions as a means of interpreting any overage agreement – these being “the normal means by which the subject matter of any offer and acceptance is identified” (Taylor v Hamer [2002] EWCA Civ 1130; [2003] 1 EGLR 103).
The mechanics of overage provisions can be complex. Look no further than the drafting for “additional residential payment” in Chartbrook Ltd v Persimmon Homes Ltd and another [2009] UKHL 38; [2009] 3 EGLR 119. The landowner argued that the court could not interfere with a carefully set out formula to calculate the payment, but the House of Lords found it was entitled to correct an ambiguous and obviously defective piece of drafting.
In Harris v Berkeley (Strategic Land) Ltd [2014] EWHC 3355 (Ch), the buyer of land argued that care units did not fall within the definition of “units of residential accommodation”, but the court rejected this argument because the definition was general and wide. In contrast, in Walker v Kenley [2008] EWHC 370 (Ch), it was held that “residential flats” meant units used as permanent residences, not holiday flats.
Leave it to someone else
Well-written agreements may have dispute resolution clauses including seeking counsel’s opinion as to whether reasonable efforts have been made and the favourability of any consent. An expert determination is likely only to be disallowed if it is manifestly erroneous (Walton Homes Ltd v Staffordshire County Council [2013] EWHC 2554 (Ch)). However, arbitrations and expert determinations themselves can become complex and protracted. Valuation methods and assumptions can be disputed (watch out in particular for equalisation clauses and infrastructure costs) and should be thought through carefully. Worked examples should be carried out and included in the contract. Some parties might even consider market-testing clauses, where values are linked to a real-world marketing exercise, or participation agreements.
Other issues
Enforcement of an overage agreement will be more straightforward against an original party. A solicitor must consider imposing obligations to pay the overage on successors in title or else might be negligent (Akasuc Enterprise Ltd v Farmar & Shirreff (a firm) [2003] EWHC 1275 (Ch)). Careful attention is needed in the case of intergroup transfers, sales of part, agreements with offshore entities concerning jurisdiction, validity of execution and security as well as the certainty of planning outcomes.
By far the greatest number of issues come from poor drafting or no drafting at all. Hardly surprising as who wants to pay serious fees for something that might never happen? Parties might consider restrictive covenants to prevent enhanced or any development. After all, if you can’t have some of the cake, then better no cake at all, but restrictive covenants might be subject to modification or discharge by the Upper Tribunal (Lands Chamber). Lease structures might help to ensure performance but might also limit funding, and the area of tenant’s rights needs to be considered carefully. Ransom strips offer physical protection, but might be defeated by alternative access or difficulties in enforcement. With so many variables, advisers should find a solution that fits the facts.
Andrew Tugwell is a property ligation partner at Payne Hicks Beach solicitors
