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Overage Agreements

The 2018 case of London and Ilford Ltd v Sovereign Property Holdings Ltd emphasises the need to draft overage agreements carefully. The case involved an overage agreement between the seller, Sovereign Property Holdings and the developer, London and Ilford Ltd.
The term overage is generally used to describe where a seller is to share in any increase in value in a property that is realised after the property has been sold, this is usually when the land may be redeveloped or valuable planning permission will be granted in the future. This enables the seller to sell at the current market value of the property without having to obtain a share in the development until the potential of the property is actually realised. Once this occurs the seller will receive a sum agreed in the overage agreement.
In this case, the developer intended to redevelop the office space into residential flats and so entered into an overage agreement with the seller. The agreement stated the developer was required to pay the seller £750,000.00 if a specific event occurred.
The event was the developer’s receipt of prior approval from the Local Planning Authority under the Permitted Development Order for the Development relating to the residential units. Therefore, once the developer receives planning permission from the planning authority this would trigger the event.
Although approval was obtained for planning, the units were not able to be constructed as it transpired the development would have breached building regulations because of their incompatibility with fire escape regulations. Therefore the developer argued if the units could not be built they could not be sold, therefore the payment should not be made.
The Court held that the rules regarding planning permission and building regulation were entirely separate in their purpose, and for the purpose of the overage agreement.
The event was clear, once the developer obtained planning permission the payment was due. There was no mention of obtaining building regulation or if the development went ahead. Furthermore, if the intention was to only make payment under the overage agreement once the units could be built, or even obtain building regulation this should have been expressly stated in the overage agreement.
Unfortunately, in this case the developer was left needing to make the payment despite not being able to develop. This may seem unfair however the case emphasises why developers, along with sellers should take extra care when entering into an overage agreement to make sure the conditions they enter into do not contradict with their intentions.

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