A recent Court of Appeal decision highlighted the need for very careful drafting when documenting “overage” (uplift) payments on development land.
In the case of Burrows Investments Limited v Ward Homes Limited, the developer had agreed to pay an additional sum to the former owner if it sold houses at a price exceeding a certain sum per square foot.
As with most overage agreements, the arrangement allowed the developer to make certain “permitted disposals” which would not trigger uplift payments.
These included “the transfer/dedication/lease of land for the site of an electricity sub-station, gas governor kiosk, sewage pumping station and the like, or for roads, footpaths, public open space, or other social/community purposes”.
The rationale behind permitted disposals is that the developer should only be required to make an uplift payment to compensate the former owner for lost value, i.e. the land becoming worth more than the developer paid for it.
In this case, the developer was required to build five affordable homes to be sold to a registered social housing provider. In the event, the developer sold the affordable housing without reaching agreement with the former owner on the payment of any overage.
The Court of Appeal, overturning the decision of the High Court, held that the sale to the social housing provider was not a permitted disposal under the terms of the agreement.
Despite the provision of affordable housing achieving an important purpose of substantial benefit for the community (as found by the High Court), the permitted disposal foresaw the provision of land for utilities, infrastructure and public open space and would be unlikely to contain buildings (and certainly not dwellings).
If the parties had intended for affordable housing sales to be excluded as permitted disposals the Court of Appeal assumed they would have expressly agreed this.
The developer was therefore held to have breached the terms of the overage agreement and was required to pay damages on the so called “Wrotham Park” basis, i.e. a sum of money that the former owner might reasonably have demanded in return for releasing the overage restriction on the affordable housing sale. (The amount of the damages to be determined separately).
Overage is an increasingly used but very complex area of development law which requires significant expertise and careful drafting.
Developers will obviously want to ensure that they are minimising their exposure to uplift payments and that overage only operates to protect former owners from lost value (rather than profiting from future development).
Our Real Estate, Land and Development team are experts in development transactions including overage and other pricing arrangements. If you require any advice or would like to discuss any of the issues raised in this article please do not hesitate to contact us.