The term ‘overage’ refers to an increase in value of a property either during or after the sale subject to certain ‘trigger events’. The classic example is for a developer to buy a plot of land, following which, the developer will then apply for planning permission to build say 50 houses. If the developer gets planning permission for more than 50 houses, the seller will be entitled to an ‘overage payment’ i.e. an increase in the sale price.
In the case of London and Ilford Ltd (the Developer) v Sovereign Property Holdings Ltd (the Seller), the ‘trigger event’ was the developer receiving prior approval from the local authority for Permitted Development to convert the property into a minimum of 60 residential units. When the ‘trigger event’ occurred, the seller claimed the £750,000 overage payment.
The developer however disagreed and stated that the payment was to provide a commercially valuable benefit and therefore Prior Approval was only valuable if the 60 residential units could lawfully be built.
Planning Application & Permission
Following an application for planning permission, it was deemed that the conversion of 60 residential units would breach building regulations. The argument therefore rested on the Court’s interpretation of the definition of Residential Units. The Developer claimed that “residential dwellings … for residential use for sale or lettings” inferred that the units had to be capable of being built, or at least be built without breaching building regulations. Without them being built, they could not be sold or let and therefore they did not obtain their commercially valuable benefit.
The Court of Appeal concluded that the planning and development consent was different to building regulations in relation to legislation and enforcement. Therefore, the ‘trigger event’ for the change of use (planning and building consent) was therefore separate to the consent needed for the development of 60 residential units (building regulations).
In conclusion, due to the significant value placed on the Permitted Development consent and the clear intention for it to be a ‘trigger event’, the Developer should have satisfied itself as to the viability of 60 residential units before signing the contract. As such, the Developer was ordered to pay the £750,000 overage payment even though they were not granted consent to build the 60 residential units.
Developers should therefore be careful when agreeing overage provisions and consider all eventualities prior to agreeing terms.
If you are looking to become a developer, or have land you wish to sell for development, get in touch with our property development Solicitor Tanya Warnes on 01473 229200.