Solicitor Cheryl Midgley looks at a recent case that looks at whether the sale of affordable housing units can trigger overage payments.

The recent case of Burrows Investments Limited v Ward Homes Limited continues to highlight the importance of taking care when drafting contractual documentation which seeks to provide for future events. The case in question deals with the issue of Permitted Disposals within an Overage Agreement.

Facts

Ward purchased land from Burrows with the benefit of an existing Planning Permission in 2007. The contract provided for overage payments in relation to any sales revenue exceeding a certain price per square foot.

In order to secure this requirement Ward agreed not to make any disposal of the land, other than a permitted disposal, without a Deed of Covenant.  

Permitted Disposals included the following:

  • Sale of units on the open market; and
  • Transfer/dedication/lease of land for electricity substations and the like, or for roads, footpaths, public open space, or other social/community purposes.

As a result of the economic downturn, together with other factors, Ward applied for a revised planning permission which was granted subject to a section 106 agreement. Within this agreement Ward were obliged to provide 5 affordable housing units. The original planning permission included no such requirement.

The view was originally taken by Ward that the sale of such units would not constitute a Permitted Disposal and negotiations were entered into with Burrows to seek a release. However, without further notice to Burrows, Ward completed the transaction to the registered provider on the basis it fell within paragraph (a) above.

Burrows disagreed with this contention and proceedings were issued and Ward later argued that the disposal was within paragraph (c) above.

The High Court found that the disposal did not fall within paragraph (a), as the sale to a registered provider at cost could not be seen to be a sale upon the open market. However, it found in favour of Ward as it was held that the provision of affordable housing achieved an important social purpose and as such the disposal was within paragraph (c).

Burrows appealed the decision. By this time it had also been agreed between the parties that no overage was payable under the terms of the agreement and Burrows sought Wrotham Park damages, ie the sum which Burrows may have reasonably negotiated with Ward for release of the restriction preventing the disposal.

Decision

The Court of Appeal found in favour of Burrows.

Whilst it was confirmed that the provision of affordable housing does indeed achieve an important social purpose for the benefit of the community, the disposal of the affordable units did not fall within paragraph (c) in this agreement.

The court focused on the fact that the disposals detailed in paragraph (c) refer to a “transfer/dedication/lease of land” and as such it would be unlikely that such land for the purposes detailed in paragraph (c) would at the time of the transfer have any buildings upon them, let alone dwelling houses.

Furthermore, the agreement contained a definition of Market Units and it was therefore held that had the intention been to include dwellings required for such social/community purposes the definition of Market Units would have been included within paragraph (c).

Finally, the Court examined the intention of the parties at the time of entering into the agreement, in particular when negotiating the definition of Permitted Disposals. It was held that the change in ethos within planning policy towards the provision of affordable housing was known to the parties and the possibility of a revised planning permission being sought was specifically provided for within the contract.

It was therefore held that the parties had the opportunity to provide for the possibility of a revised planning permission requiring the provision of affordable housing, with the resulting disposal of such units falling within the definition of Permitted Disposal- but no such provision was made.

The Court found therefore that Ward had breached the terms of the agreement and that Burrows was entitled to damages on a Wrotham Park basis. Whilst it was accepted that no overage would have in any event become payable, the restriction upon title was itself an important asset which entitled Burrows the opportunity to negotiate a release.

Conclusion

Whilst each overage agreement is specific to the circumstances of the individual transaction this case highlights the need to consider not only the disposals within contemplation at the time of entering into the agreement, but also the potential implications if any amended planning applications are made and granted.

Whilst not an issue within the headline case thought should also be given when providing for disposals of affordable housing as to the nature of that transaction. In particular will this be a transfer of completed dwellings (“turnkey disposal”) or a transfer of land upon which a partially constructed dwelling sits (“golden brick disposal”).

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