What are overage payments and when are they triggered?

We look at a recent Court of Appeal decision where a developer was ordered to pay an overage payment of £750,000, despite the fact that the development that triggered it was not capable of being carried out.

Overage payments are an important way in which a landowner can ensure that it receives a share in the financial uplift in the value of land bestowed by planning permission, even after it has sold the land. They can be very substantial and so careful wording of overage provisions is required to ensure that overage operates as intended.

Overage provisions are triggered by specific events. Commonly, they are triggered by the sale of units developed under a planning permission. Sometimes, however, they are triggered at an earlier point, for example once planning permission is granted.

But what happens if the planning permission which is the trigger for the overage provisions turns out to be incapable of being implemented?

Commercial common sense might suggest that if the planning permission is not capable of being implemented, then the overage provision should not kick in because the planning permission has not actually bestowed a financial benefit on the developer. However, this is not a view shared by the Court of Appeal in a recent decision[1].

In this case, an overage payment of £750,000 was triggered by the buyer on obtaining a Prior Approval (under a Permitted Development Order) for the conversion of offices to a minimum of 60 residential units.

Prior Approval was granted by the Local Authority. However, the 60 units were incapable of being constructed because they were incompatible with the fire escape provisions of the Building Regulations. The buyer could not therefore construct the 60 units. However, the seller insisted that, since Prior Approval had been granted for the development, then the overage payment should be made.

The buyer refused to pay the overage payment and the matter ended up at court. The buyer argued strongly that the intention of the overage provision was that both the buyer and seller would share in the value of the development. Since the development could not actually be built, there was no value to share in.

The High Court, and subsequently the Court of Appeal did not agree with the buyer, however. The trigger for the overage provision was the Prior Approval of the development of 60 residential units. Therefore, the only thing required to trigger the overage provision was the grant of Prior Approval. It was irrelevant that the development could not then be built out.

Summary

In the last few years, the Courts have been taking an increasingly strict view as to the interpretation of contractual provisions such as overage provisions. Unless there is a very good reason for doing so, the Court will not depart from the actual wording in the contract, even if this does not appear to make commercial sense.  Great care therefore needs to be taken when negotiating and drafting overage provisions, to ensure that they reflect precisely what the parties intend.