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136: Overage – payments that go on…and on…and on

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136: Overage – payments that go on…and on…and on
Leave your thoughts Jennifer Chappell

By Jennifer Chappell

Overage describes the situation where a seller takes a share in any increase in value of a property that is realised after the initial sale ie where there is a reasonable expectation that the land may be redeveloped or planning permission obtained in the future.

In the case of Burrows Investments v Ward Homes, a buyer agreed to pay overage on the excess value of each house built on the property which was sold over a certain figure. The overage clause also importantly deal with ‘exempt’ transactions not intended to be caught by the overage.

Facts

A property company, Burrows Investments, sold land to a development company, Ward Homes. The land had planning permission to be re-developed into residential units. The parties agreed that Burrows would receive overage if Ward disposed of the units at a price exceeding a certain sum per square foot.

The agreement provided that Ward could not make disposals, except for ‘permitted disposals’, without the buyer entering into a deed of covenant with Burrows in respect of future overage payments.  Permitted disposals (ie ‘exempt’ from overage) included:

  1. disposals in the open market at arm’s length; and
  2. transfer, dedication, lease of land for the site of an electricity sub-station, gas governor kiosk, sewage pumping station and the like, or for roads, footpaths, public open space, or other social / community purposes.

The planning permission for residential development did not contain any provision for social housing. However, when Ward obtained a revised permission for the development it was subject to a section 106 agreement. This required Ward to provide affordable housing properties to a registered social housing provider.

Ward initially took the view that the sale of the five affordable houses at cost price would not be an exempt disposal under the agreement. Ward began negotiations about the terms on which Burrows would be prepared to approve the disposal. However, before any agreement had been reached and without giving notice, Ward sold the five homes to a social housing provider.

Ward claimed that the sale was a disposal in the open market within paragraph (1) above. Burrows disagreed and began proceedings for a declaration that Ward had breached the agreement. Ward then argued that the disposal was within paragraph (2).

Decision

The High Court held that the transaction was not a ‘permitted disposal’ within paragraph (1) because it had not been made in the open market. The court found, however, that the provision of affordable housing achieved an important social purpose of substantial benefit to the community and was therefore within paragraph (2).

Burrows appealed and claimed damages based on the sum of money that Burrows might reasonably have demanded from Ward in return for releasing Ward from the obligations in the agreement that prevented the disposal of the affordable housing.

The Court of Appeal allowed Burrow’s appeal. The sale of affordable housing to a registered social housing provider was not an exempt disposal within paragraph (2). Land that was transferred for the site of an electricity sub-station, gas governor kiosk or sewage pumping station, for use as a road or footpath, or as a public open space, would be unlikely to have any buildings on it at the date of transfer and would not have any houses on it.

A ‘transfer’ as referred to in paragraph (2) did not include the transfer of a completed dwelling. The change in planning to require affordable housing would have been within the knowledge of the parties prior to entering into the agreement. The parties could have expressly excluded disposals of affordable housing to be a permitted disposal, but no such wording was included.

The court found that Burrows was entitled to damages.The fact that no overage would in fact have been payable (due to market conditions) did not prevent a claim on this basis.

Comment

This case highlights the need to consider how certain disposals and future planning agreements are specifically dealt with in overage clauses. The wording of overage agreements must be very clear about what it and is not included, particularly what is in the contemplation of the parties at the start of the transaction for what may happen in the future.

Burrows Investments Limited v Ward Homes Limited [2017] EWCA Civ 1577

7 December 2017

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