Much of our daily diet in Chambers consists of land sale agreements containing overage provisions, which the seller is having difficulty enforcing against the buyer or its successor in title. It is tempting to conclude overage provisions are not worth the paper they are written on, although we readily accept that we do not see those cases where the mechanism has actually worked smoothly – if indeed there are any.
There is no standard drafting that avoids all risk
A paradigm overage clause in an agreement for the sale of land will seek to capture, for the seller’s benefit, a share in the value of the land which the buyer will have enhanced by gaining planning permission for its development. In drafting such an overage clause, each party will have tried to cater for all possible contingencies. Here, however, the developer, often with greater experience, will usually have the upper hand.
The problems encountered by the land seller can be of two broad types. First, there are those where the trigger event envisaged by the agreement has not arisen, or has evolved in a way the parties (or at least the seller) did not envisage, often because the buyer has acted in such a way as to prevent the trigger event arising. Examples of this in the reported cases abound, but it is worth mentioning two, to illustrate the point that what goes wrong, from the seller’s point of view, may often be really quite foreseeable and straightforward – and therefore avoidable at the drafting stage.
In Sparks v Biden [2017] EWHC 1994 (Ch); [2017] PLSCS 170, overage was payable on sale of any of the new houses contemplated by the parties’ development agreement. However, instead of selling the houses, the defendant buyer let all but one, and occupied the other, contending that there was no express term in the agreement requiring him to sell any of the houses. Ultimately, the judge rejected the defendant’s contention that no overage was payable, holding that the agreement was subject to an implied term obliging the buyer to sell the newly developed houses within a reasonable time period.
In Renewal Leeds Ltd v Lowry Properties Ltd [2010] EWHC 2902 (Ch); [2011] PLSCS 22, the claimant had sold land to a developer of residential housing, pursuant to an agreement which provided for the payment of overage once sales revenue exceeded a certain figure, following “the final sale of a completed residential unit”. The developer developed 84 houses, but left four houses incomplete and unsold, and claimed that since the triggering event had not happened, no overage was payable.
Once again, an implied term came to the claimant’s rescue, to the effect that, if the developer carried out the development, then it was obliged to complete and sell the final unit and to pay overage. The reasonable party would understand the agreement to mean that if the development was carried out, the developer would complete and would not sterilise the last unit so as to prevent the payment of overage.
A number of similar recent cases illustrate the courts’ willingness to ensure that aspects of the detail of the drafting of overage agreements do not defeat the central underlying commercial purpose of the overage provisions – namely that, if the developer realises a development value from the site, it has to share that value with the vendor. However, there are limits to this readiness to imply appropriate terms preserving the right to overage, as Fairhaven Shipping Co (UK) Ltd v Munding [2022] UKUT 260 (LC); [2022] PLSCS 160 shows. Fancourt J held that a term should not be implied preventing collusive avoidance of an overage mechanism (although it is fair to say he may have felt comforted in his conclusion by his acceptance of the seller’s arguments on another issue).
In words which will be duly noted by all conveyancers, Fancourt J observed that it was difficult to draft a wholly watertight contract providing for overage, protecting a party against fraud and collusion, and added: “How far the parties go in providing such protection depends on their perceptions of the risks, when they are negotiating, and what they are able to agree. There is no standard drafting that avoids all risk.”
The difficulty of enforcement
So much for the difficulties involved in drafting the trigger event in a way that the buyer cannot find a way around. Even where this is done, sellers of land often find considerable difficulty in procuring that the overage clause binds successors in title.
For example, in Akasuc Enterprise Ltd v Farmar & Shirreff (a firm) [2003] EWHC 1275 (Ch), the claimant agreed to sell land to Mansard Country Homes Ltd, for a minimum sale price of £619,500, but with overage entitlement in the event that the property was developed for residential units and sold. However, the agreement imposed no obligation on Mansard itself to develop and sell, but only imposed on it an obligation to pay an overage if it did so; and it did not attempt to impose the obligation to pay the overage on successors in title. In the event, Mansard sold the land to Charles Church Developments Ltd for £1,050,000. That company then developed and sold the property for a total of £5,083,000. Mansard was not liable for any overage, because it had not developed the property; and neither was Charles Church, since it had no contractual relationship with the claimant.
The judgment analyses a number of ways in which the entitlement to enforce the overage provisions against successors in title of the buyer might have been secured, including the incorporation of a right of entry on breach of the obligation to pay; or a chain of contracts protected by a restriction on the land register; or a restrictive covenant to be released only on payment of overage. None of these is foolproof, however, for reasons that would take many more of these articles to explain.
Guy Fetherstonhaugh KC and Oliver Radley-Gardner KC are barristers at Falcon Chambers
