Our Commercial Property department, looks at the prior approval of permitted development rights triggering overage payment despite the development being incapable of construction.
The Court of Appeal recently considered the interpretation of a provision triggering payment under an overage agreement in the case of London and Ilford Ltd v Sovereign Property Holdings Ltd .
Overage Agreements and Trigger Events
Overage agreements are a great tool for sellers who are keen to share in any increase in value in a property that is realised after the property has been sold. Sellers are likely to negotiate an overage obligation from the developer (buyer) where there is a reasonable expectation that the land may be redeveloped or that a valuable planning permission may be granted in the future.
Trigger events lead to the developer having to make an overage payment to the seller. Common examples of trigger events are the grant of planning permission or the implementation of a planning permission – building it out. Since the actual payment of the overage payments are dependent on the occurrences of a trigger event, meticulous consideration is required in deciding what the trigger event should be.
In London and Ilford Ltd the developer intended to redevelop the office space at the property into residential flats. Under the overage agreement the developer was required to pay £750,000 if a “first trigger event” occurred during the overage period. The first trigger event was the developer’s receipt of prior approval from the local planning authority under the Town and Country Planning (General Permitted Development) (England) Order 2015 for the change of use relating to residential dwellings for sale or lettings.
In this case, the prior approval was obtained within the overage period and the seller claimed the sum of £750,000. The developer, however, argued that the prior approval for a change of use was only valuable if the residential dwellings could be lawfully built. Essentially the developer was trying to reason that the overage agreement’s purpose was to provide a commercially valuable benefit. In the eyes of the developer, obtaining just the prior approval was not a commercially valuable benefit.
It later emerged that construction of the residential dwellings would contravene building regulations.
The Court of Appeal found in favour for the seller and dismissed the appeal.
The first trigger event was clear and expressly concerned the change of use. There was no mention in the overage agreement of compliance with building regulations before the residential dwellings could be built. The provisions of the overage agreement should have been made clearer if this was to be the case, especially considering that both the developer and the seller were experienced parties and had been professionally advised. If it was intended that the first trigger event should require any such compliance, the parties should have made express provision to that effect.
Importance had clearly been attached to the receipt of that prior approval and not to whether or not the prior approval could lead to the residential dwellings being built.
Developers should be particularly careful when checking the drafting for the trigger of an overage payment. The trigger events and their timing should be cautiously considered, for example, it may be more appropriate to have an overage payment triggered by the implementation of planning permission or the actual disposal of the completed units rather than by the permission being granted.
The findings of the Court of Appeal tell us that the drafting of overage agreements, specifically the trigger events and timings, should be decided carefully. The provisions should be very clear and there is less likely to be any sympathy from the courts if the parties are experienced in the world of development and have obtained professional advice.
If you have any questions or would like to discuss any of the issues raised in this blog, please feel free to contact our Commercial Property team.