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Overage Agreements: Let’s Be Clear

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The recent Court of Appeal decision in Burrows Investments Limited v Ward Homes Limited [2017] EWCA Civ 1577 affirms an important message for Developers: overage agreements between Sellers and Developers must be clearly drafted and provide as far as possible for changes in planning permission during the course of the development.

The Burrows decision highlights that a lack of clarity in the overage agreement can lead to confusion which, in this case, resulted in the Developer being found liable for compensation to the Seller for breaching the overage agreement.

The Facts

The Seller sold to the Developer a plot of land with the benefit of planning permission for a residential scheme.

It was agreed that the Developer would pay the Seller an overage fee if, following the construction of residential units, the Developer sold any such units for a price above a fixed ceiling.

To protect the Seller’s right to receive this overage fee, it was also agreed that the Developer required approval from the Seller before disposing of all or some of the land. However, a number of ‘Permitted Disposals’ were carved out which did not require the Seller’s approval including “a transfer…of land…for roads, footpaths, public open spaces or other social/community purposes”.

Having purchased the land from the Seller, the Developer in fact decided to pursue a different scheme which required a new planning permission. The new planning permission, unlike the original permission, required the Developer to provide five units of affordable housing to a registered provider of social housing.

The Developer proceeded to develop out the land and, without the prior approval of the Seller, sold the five units of affordable housing to a social housing provider. The Seller subsequently brought a claim arguing that the Developer had not made a Permitted Disposal and had therefore breached the agreement by not obtaining approval from the Seller before disposing of the five units in this way.

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The Decision

The High Court held that the Developer’s sale of five units to a social housing provider was of substantial benefit to the community and therefore came within the agreed wording of Permitted Disposal as “a transfer…of land…for roads, footpaths, public open spaces or other social/community purposes”.

However, the Court of Appeal reversed the High Court’s decision deciding that the sale was not a Permitted Disposal and the Developer had therefore breached the overage agreement. The sale was held not to be a Permitted Disposal on the following two grounds:

  • the five units sold to the social housing provider were completed dwellings and it would therefore be ‘very strange’ to describe the Developer as disposing of ‘land’ (as per the definition of Permitted Disposal). The sale of the five affordable housing units did not therefore come within the definition of Permitted Disposal because they were not a transfer of ‘land’;
  • the activities of a social housing provider do not fit in to the ‘other social/community purpose’ category in the definition of Permitted Disposal.

Lord Justice Henderson explained that:

“The words ‘or other social/community purposes’…have to be read in the light of the three specified purposes which precede them, and with at least a provisional inclination to interpret the social and/or community purposes which the parties had in mind as being purposes akin to the provision of land for roads, footpaths or public open spaces.”

Conclusion

Burrows illustrates the importance for parties drafting overage agreements to anticipate that new planning permissions may be obtained in the course of the development and to provide, as far as possible, specific and well-defined provisions accordingly.

The case also serves as an important reminder that Developers must be aware of the possible limitations of overage agreements and appreciate that some eventualities might not be accounted for at the outset. In these circumstances, consultation with the Seller can be preferable to turning a blind eye to any potential requirement to obtain the Seller’s consent for the sale of the property.

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