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Overage triggers: a cautionary tale...

London & Ilford Ltd v Sovereign Property Holdings Ltd [2018] EWCA Civ 1618

The Court of Appeal’s recent decision in London & Ilford Ltd v Sovereign Property Holdings Ltd [2018] will serve as a caution to property developers, reminding them that they should review proposed overage terms carefully and consider not only when an overage payment is to become due, but also what conditions will apply to an overage ‘trigger’.

Facts

In this case, London & Ilford Limited (“Developer”), entered into an option agreement with Sovereign Property Holdings Limited (“Seller”). This option agreement stipulated that the trigger event for payment of an overage sum would be the prior approval from the Local Authority for a change of use to convert offices into 60 residential units under the permitted development rights granted by the Town and Country Planning (General Permitted Development) (England) Order 2015.

The prior approval was duly granted to the Developer and the Seller demanded payment of the £750,000 overage sum. Unfortunately for the Developer, since the parties had entered into the option agreement, changes had occurred which meant that the intended development would not comply with the Building Regulations’ fire escape provisions. Lawful construction of the proposed development was, therefore, impossible.

As the Developer could not construct the planned development, the Developer argued that the overage sum was not due because the development could not be lawfully constructed. The Developer justified non-payment of the overage sum on the basis that lawful construction of the proposed development was an integral part of the trigger event, and that this was clear, as the option agreement stated that the trigger was to be receipt of prior approval for Residential Units and the definition of Residential Units was for ‘residential use for sales or lettings.’

Decision

The Court of Appeal did not agree with the Developer’s argument and concluded that if compliance with Building Regulations was a condition of the overage trigger then this would have been expressly included in the overage deed. The Court of Appeal concluded that the overage trigger in question was clear in that it concerned the change of use only and that compliance with Building Regulations was neither mentioned in the overage agreement nor a requirement of it. The overage sum was therefore ruled to be payable to the Seller.

Practical Considerations

Developers must ensure that overage triggers are properly considered when they are negotiating overage terms and that the negotiated terms are clearly documented in overage agreements. If it is agreed that the grant of planning is to be an overage trigger, then it would be advisable for a developer to negotiate that payment of the overage sum should only become due on actual implementation of the planning permission, in lawful accordance with relevant legislation, to avoid paying overage payments if a development becomes no longer possible of lawful construction. This cautionary tale should also serve as a general reminder to developers to ensure that any overage agreements they intend to enter into are properly drafted, that the provisions have been properly considered, and that the agreement correctly reflects all of the commercial terms agreed between the parties.


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