Sellers use overage agreements to maximise the price for land. The expression describes the additional sums that the seller hopes or expects to receive where land is sold before its development potential is fully realised. However, overage transactions are never straightforward.
Groveholt Ltd v Hughes [2012] EWHC 3351 (Ch) concerned a site that was sold for the construction of a large food supermarket and also for residential use. The seller had negotiated to receive an overage payment of £2m in respect of part of the site within 10 years, failing which the buyer agreed to transfer the land in question back to the seller for a nominal consideration.
The 10 year period elapsed and the seller tried to recover the land from a company that had acquired the land from the buyer. The difficulty was that the seller did not have any contractual relationship with the company and had never registered his right to repurchase the land. Nonetheless, he argued that the company was fully aware of the terms of the overage agreement and was obliged, as a constructive trustee, to give effect to his rights.
The judge accepted that the law may, in certain circumstances, impose a constructive trust on a transferee of registered land to give effect to rights in favour of a third party, notwithstanding their non-registration: Lyus v Prowsa Developments Ltd [1982] 1 WLR 1044. However, the circumstances in which a constructive trust will arise have been narrowly confined and the judge was not aware of any English case in which the precedent of Lyus had been successfully relied on to subject a purchaser to an interest that could have been, but had not been, protected by registration.
The court will not impose a constructive trust unless it is satisfied that the conscience of the new owner is affected, so that it would be inequitable to allow him to deny the claimant an interest in the property. In deciding whether or not the conscience of the new owner is affected, the court must ask whether the new owner has undertaken a new obligation to give effect to an encumbrance or prior interest.
Very special circumstances will be required to show that a buyer has accepted a new liability to give effect to rights in favour of third parties, especially as contracts for sale usually refer to prior encumbrances and interests simply to safeguard sellers against claims from purchasers: Chaudhary v Yavuz [2011] EWCA Civ 1314.
The contract for sale between the buyer and the company did not provide that the sale was subject to the seller’s rights over the land. A provision to this effect would not, of itself, have sufficed to establish a constructive trust in favour of the seller (unless it had placed the company under a new personal obligation to the seller). However, the absence of such a provision was fatal to the seller’s claim. As a result, the company was not under any obligation to surrender the land to the previous owner.
The decision reminds us that option holders must protect their options by registration to ensure that subsequent owners of the land are bound by their rights.
Allyson Colby is a property law consultant
