Overage – the gift that keeps on giving?

In a rising market or where the outcome of a planning application for a development site may be uncertain a buyer and seller can share risk by including an overage provision in the sale contract. The principle of overage is easy to agree but the drafting can be very complex.

An overage provision can reassure a seller that if the price is “wrong” for a development site there is a chance to go back for more – but do sellers always realise the limitations of what they have agreed? And do buyers sometimes get it wrong?

Overage understood

It is not uncommon for a property deal to include overage provisions. The general objective of overage is to allow the seller an additional payment if the property sold turns out to be more valuable than anticipated. There can be various triggers to an additional payment such as a more valuable planning permission being granted or a better than anticipated price being secured for the development once built.

Through this mechanism, a buyer will hope to keep the initial price down – but risk sharing any excess profits. The Seller on the other hand lives in hope of a windfall having accepted a price which may be based on conservative assumptions of what can be achieved in planning terms or what the market for built units will be. Both may feel comforted by this arrangement.

Overage misinterpreted?

Committing such agreements to legally watertight words is where problems begin. Covering all conceivable possibilities leads to all sorts of drafting complexities. Unfortunately, the unforeseeable can arise despite intricate drafting and the best efforts of all concerned.

In the case of Burrows Investments Ltd v Ward Homes Ltd the buyer had agreed to pay an overage on the excess value of each house it sold over a threshold figure. As an additional protection, the overage provisions covered such eventualities as the buyer selling the site undeveloped (in which case the new buyer had to covenant to comply with the overage provisions) and a restriction was registered at the Land Registry requiring a certificate of compliance before any sale could be registered. The clause also dealt with exempt transactions not intended to be caught by the overage provisions. As is sometimes the case the clause allowed the buyer’s solicitor to issue the certificate of compliance. So far so good.

The buyer in this case then obtained a revised planning permission which required social housing to be built on part of the site. The buyer agreed to sell five housing units to a registered social landlord – and took the view that the overage provisions did not apply and self-certified that this was the case for Land Registry purposes. The seller challenged this as the disposal was not an exempt disposal and demanded damages, even though this was not a sale at a price in excess of the threshold price.

The judge resolved this apparent lacuna in the drafting by finding that the disposal was after all an exempt disposal – but only achieved this by stretching the interpretation of the overage provisions to a perhaps uncomfortable extent.

Overage lessons learned

  1. The most important point to come out of this for sellers is the risk inherent in allowing the buyer to certify compliance with overage provisions. In other circumstances, the issues would have had to be confronted before any sale took place possibly avoiding litigation. The seller may also have lost the sympathy of the court chasing after a substantial windfall payment in circumstances where there was no obvious excess profit for the buyer from which to pay overage. It may also highlight the extent to which such clauses will be construed against a seller.
  2. From the buyer’s perspective it highlights the need to make sure that its list of exempt transactions is comprehensive. Beware of changes to development proposals that may not have been anticipated when agreeing the overage provisions. And perhaps discussing any apparent grey areas with the seller could have saved the parties from litigation.

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Every piece of content we create is correct on the date it’s published but please don’t rely on it as legal advice. If you’d like to speak to us about your own legal requirements, please contact one of our expert lawyers.

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