Overage payable even though planning permission not implementable

The recent case of London and Ilford Ltd v Sovereign Property Holdings Ltd [2018] EWCA Civ 1618 is a reminder of the need to take care in drafting and agreeing overage provisions. In this case the developer bought an office building with the intention of changing its use to a residential use. Overage was agreed if they succeeded in securing planning permission for more than a threshold level of residential units (in this case 60 units).

It was agreed that the seller would submit an application for prior approval (as the development was to be carried out under the office to residential change of use permitted development rights). The layout plans were prepared by an architect, although they were not full technical architectural drawings, and they were seen and approved by the developer and appended to the overage agreement.

Prior approval was subsequently obtained, however the developer discovered that the development could not be fully implemented as it would not comply with building regulations and that the number of residential units that could be provided would in fact be less than the overage threshold. They refused to pay the £750,000 overage to the seller and claimed that the purpose of the overage agreement was to provide a commercially valuable benefit in exchange for the payment, and as the scheme could not be implemented there was no commercially valuable benefit and the payment was not due.

Following litigation the Court of Appeal rejected the developer’s position not least because as a sophisticated developer it should have been aware of the risk and it had approved the plans having had an opportunity to ensure that they related to an implementable scheme. The Court of Appeal also held that the parties had placed great value on the grant of prior approval and rejected the developer’s claim that it had no utility unless it related to a scheme that could be fully implemented.

Comment:

This is a helpful reminder of the need to exercise caution in agreeing overage clauses. Had this been a planning conditional agreement to sell the property it is likely that the developer would have included clauses requiring the planning permission to be a satisfactory planning permission, and that this would be clearly defined. However, it may be that such caution was not exercised as this was an overage agreement.

Parties entering into overage agreements should give careful consideration to their terms and the triggers for the payment of overage.