Overage: a trap for the unwary

A recent case has again highlighted the risks of poorly drafted overage provisions. In this case, the unfortunate party was the buyer, but there were also potential lessons for sellers as well.

What is Overage?

Overage is a mechanism for enabling a seller of land to share in future increases in the value of that land, usually where there is potential for the development of that land. It is often on the basis that once planning permission increasing the value of the land has been obtained, the buyer will pay a proportion of the increase in the value of the land to the original seller.

The Facts

The case was Loxleigh Investments Ltd v Dartford Borough Council. In this case, Dartford BC sold land to Loxleigh with the benefit of outline planning permission for five detached houses. The transfer to Loxleigh provided for overage to be payable on “the granting the Facts detailed planning permission which grants planning permission for the construction of the Units”.

Loxleigh applied for reserved matters approval (approval of detailed plans and the like) which was successful. The Council argued that this reserved matters approval was “detailed planning permission” for the purposes of the overage provision.

Loxleigh argued:

• that it wasn’t detailed planning permission for those purposes;
• that overage payment should only arise on future unpredictable events, rather than obvious ones, such as turning existing outline permission into a detailed one; and, finally
• that it could not have been intended that the Council could benefit from repeated overage payments being triggered through different permissions over a period of time.

The Decision

The problem was that “detailed planning permission” is not defined in planning legislation, so the Court had to fall back on the ordinarily understood meaning of the term. The Court decided that this would include obtaining reserved matters approval in relation to an outline planning permission. It also felt that the word “any” in the overage provision included different types of the planning application, so was wider than it might otherwise have been.

The Court held:

• that the reserved matters approval did satisfy the overage provision and, accordingly, overage (which on the facts, was £50,000) was payable; but
• that the liability to make an overage payment would only arise once for each unit so that the uncommercial outcome of repeated payments would not occur.

The Implications

Any party entering into overage provisions needs to carefully consider the details. In this case, neither party got what it might have expected.

Loxleigh assumed that reserved matters approval would not trigger overage, because the land was sold with the benefit of the existing outline planning permission so that permission had already been factored into the price it paid for the land.

The Council may well have assumed that further overage payments would be payable on additional planning permissions – many overage agreements allow for this to prevent a developer from getting a relatively low-value planning permission (say for light industrial units) paying the overage based on that value, then applying for a higher value planning permission such as housing.

The Lesson

Overage agreements are very complex and are often not thought through properly at the negotiation stage. Matters such as trigger, length of overage period, allowable costs to set against overage payment, and whether repeated payments can be required should be carefully considered, to avoid the risk of unexpected outcomes. Careful drafting is also needed to ensure that those intentions are properly translated into the final document.

Before entering into overage provisions (or, ideally, before even starting negotiations) you should make sure that you discuss your requirements with a solicitor who is experienced in dealing with overage, to make sure that you avoid the potential traps, and that the provisions reflect your intentions.

If you have any questions, or need any advice on overage provisions, please contact Simon

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