Overage agreements often result in disagreements between the parties. Aberdeen City Council v Stewart Milne Group Ltd [2011] UKSC 56 concerned a developer’s liability to pay overage, which was triggered by sales and lettings. However, the overage agreement included additional provisions enabling the developer to buy out the overage in return for a payment based on the open market value of the land.
The developer sold the land to a wholly owned subsidiary at a price that resulted in a zero uplift. The seller refused to accept the transaction at face value. It asked the court to calculate the overage by reference to the open market value of the land, even though the overage agreement provided for an uplift based on the sale proceeds.
The Supreme Court found in favour of the seller. It decided that it was reasonable to assume that the parties had expected to arrive at the same base figure for overage, even though the parties had agreed to use different formulas to calculate the uplift payable on sales or lettings and in the event of a buy out. Basing the calculation on the open market value of the land achieved the commercial purpose of the overage agreement, which was to enable the seller to participate in a share of the development value of the land.
The court rejected the developer’s argument that it would never have agreed to pay the uplift before realising a profit from the development, and that it would be wrong to read the contract in this way. It pointed to the overage provisions that applied on the grant of a lease, which required the developer to make pay a payment based on open market value, and reminded the developer that the timing of transactions was in the developer’s own hands.
Had an officious bystander been asked whether a term should be implied that an open market valuation should be used to calculate overage in the event of a sale that was not at arm’s length in the open market, he or she would have said “of course”, because this would be necessary to give the contract business efficacy. Consequently, the court would imply such a term.
The decision indicates the courts’ reluctance to allow developers to obtain a windfall – especially from the public purse. However, there are limits on the extent to which the judiciary can protect a party that has entered into a commercially disadvantageous agreement and it is never safe – or cheap – to rely on the courts to ride to the rescue of a poorly-drafted overage agreement.
Consequently, sellers would be well-advised to scrutinise overage provisions carefully to ensure that they limit the opportunities for avoiding liability for the uplift. The term “disposal” should be widely defined. It may also be advisable to incorporate an additional trigger for a “deemed disposal” and to include valuation provisions to deal with transfers at an undervalue and consideration given in kind.
Allyson Colby, property law consultant
