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Overage and ‘hypothetical bargain’ damages

Burrows Investments Ltd v Ward Homes Ltd [2017] ESCA Civ 1577 is a recent case in which the Court of Appeal considered two issues:

1) The construction of the overage agreement
2) Whether Burrows Investments Ltd (Burrows) was entitled to ‘negotiation damages’.

What is overage?

Overage enables a Seller to share the uplift in the value of the sold land if certain circumstances arise, such as the grant of planning permission. The trigger event will require a Buyer to make an additional payment to the Seller, representing a percentage of the increased value of the land. 

The facts

Burrows sold land to Ward for residential development, subject to an overage clause providing that Ward would pay Burrows an uplift of around 30% of the amount by which the total proceeds of sale received by Ward from disposals of “Market Units” exceeded a specified sum per square foot.

As is usual with overage agreements, Ward was allowed to make certain “Permitted Disposals” and relied on:

1. Paragraph (a) which allowed a Residential Disposal of Market Units in the open market at arm’s length
2. Paragraph (c) which allowed for “the transfer...of land… for roads, footpaths, public open spaces or other social/community purposes”.

Ward obtained a revised planning permission for the land and also entered into a section 106 agreement which obliged Ward to transfer five affordable housing units to a registered social housing provider nominated by the local authority.

Ward originally took the view that the disposal of the five affordable housing units would not be a Permitted Disposal, and entered into negotiations with Burrows to approve the transaction. Before any agreement was reached, Ward sold the affordable units to the social housing provider in accordance with the section 106 agreement. When Burrows learned of this disposal, Ward asserted that the disposal was a Permitted Disposal under paragraph (a) and later in litigation relied on paragraph (c) in the alternative.

Originally, the High Court held that the disposal fell within paragraph (c) due to provision of affordable housing falling within the social benefit to the community. The Court of Appeal disagreed, ruling that the disposal did not fall within paragraph (c).

Key point  construction 

The parties did not dispute the principles of contractual interpretation which provide that, where the terms of an agreement are unclear, the court can interpret what the parties intended.

In assessing whether the sale of the affordable housing units could fall within paragraph (c), the Court accepted that this was a social and community benefit. However, it applied the ejusdem generis principle, which states that where a general phrase follows specific preceding purposes, then the general phrase (here being “other social/community purpose”) would be interpreted as limited to examples of the same type. The Court therefore held that the affordable disposal was not a Permitted Disposal under the agreement and Ward would have to negotiate a release of the overage to proceed with the sale to the social housing provider.

Key point 'hypothetical bargain' damages

Burrows did not dispute that had the affordable units been sold at market value no overage would have been payable, as the price per square foot would not have been exceeded. Burrows instead claimed damages on the basis of what Ward should have agreed to pay Burrows to release the overage restriction on the title.

The Court held that Burrows had a legitimate interest in securing Ward’s compliance with the overage provisions. Burrows was not seeking a ransom from Ward, but merely compensation for the loss of the opportunity to negotiate a reasonable price for releasing Ward from its contractual obligations. The benefit of the overage restriction was potentially a valuable piece of property in its own right and Burrows had been deprived of the right to exploit it. The Court held that Burrows was entitled to ‘hypothetical bargain’ damages with the specific amount to be determined by the Court should the parties fail to agree.

Practical points

This case is another reminder that the Courts will consider the parties’ intentions when reviewing the terms of a contract, and therefore drafting should be beyond doubt. Specifically, when lists are provided with a general sweeper provision, it may not widen the interpretation of the clause as it will be read in light of the preceding examples.

Planning policy can change and new planning permissions may be required or pursued for development of a site, and so the drafting of overage provisions should be dealt with care, and as far as possible should contain sufficient permitted disposals to satisfy any potential planning obligations.

Overage agreements are specific to individual circumstances, and in this case the Court confirmed that ‘hypothetical bargain’ damages could be claimed even if there would be no loss arising from breach of an obligation.

Published: December 2017

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