Overage agreements oblige buyers to make further payments if one or more specified events occur within an agreed time-frame. They enable sellers to share any subsequent increase in the value of land after it has been sold and are usually applied to land with development potential. However, it is also possible to apply an overage agreement to buildings that could be sold or let for a substantial premium when they become vacant.
Hildron Finance Ltd v Sunley Holdings Ltd [2010] EWHC 1681 (Ch); [2010] PLSCS 185 concerned an overage agreement that affected a porter’s flat in a residential building. Under the agreement, the new owner undertook to sell a long leasehold interest in the flat if it became vacant within the following 21 years and to share the purchase price with the seller.
The overage agreement predated the Leasehold Reform, Housing and Urban Development Act 1993, which changed the law significantly confering rights of collective enfranchisement on qualifying tenants. In 2004, a requisite majority of qualifying tenants exercised their right to acquire the freehold of their building. As a result, it would have been unlawful for the new owner to comply with the terms of the overage agreement, even though the flat subsequently became vacant, and any purported sale of a long leasehold interest in the flat would have been void: see section 19(1).
The parties asked the court to decide what effect, if any, this had on the obligation to pay overage. The seller argued that it was entitled to a share of the amount that the tenants had paid to acquire the flat. The owner of the building argued that the seller was asking the court to rewrite the overage agreement, which was impermissible.
The judge agreed with the new owner. He accepted that the seller had imposed the overage agreement to unlock the value of the flat. However, the agreement prescribed the steps that must be taken to realise the value of the flat, predicated on the assumption that the flat could be sold in the open market, under a new long lease in a standard form, at a price approved by the seller.
The parties could not have foreseen the way in which the 1993 Act would operate. It had become impossible to perform the contract in the way the parties had intended and it would be unreasonable to require the owner of the building to pay damages for its failure to do so.
Therefore, although it might appear unjust that the owner of the building would receive a windfall (because the tenants had paid £200,000 for the flat), the only legal solution available in English law was to rule that the overage agreement had been discharged by frustration, without fault on either side.
The decision illustrates the difficulties of catering for the unexpected when drafting overage agreements that tie up land for lengthy periods and highlights the dangers of limiting triggers for the payment of overage to events that might never occur.
Allyson Colby is a property law consultant
