Overage – Building Regs is the costly dark horse

OOffice redevelopmentverage agreements are entered into between a Seller and Buyer where there is a reasonable expectation that the land has the potential to be redeveloped or for planning permission to be granted for development. The Seller is then entitled to a slice of this increased value.

London and Illford Ltd (L&I) v Sovereign Property Holdings Ltd (SPH) (2018)

In this case L&I intended to redevelop the office space at the property into residential flats and so the purchase was subject to an overage agreement. L&I was required to pay SPH £750,000 if a “first trigger event” occurred during the overage period. This event was L&I’s receipt of prior approval from the Local Planning Authority for the Development relating to a minimum of 60 Residential Units at the property.

Development was defined as: “development of the Property comprising of a change of use … to a use falling within Class C3 (dwelling houses) of the Permitted Development Order.”

Residential units were defined as: “residential dwellings to be comprised in a development at the Property for residential use for sale or lettings…”

SPH claimed the sum of £750,000 from L&I once prior approval had been obtained. Unfortunately for L&I they had received the prior approval and therefore the trigger event had occurred. This was of little value to L&I as it was discovered that the construction of the 60 Residential Units would contravene building regulations because of incompatibility with fire escape provisions.

Judgment was granted in favour of SPH and an appeal by L&I was dismissed. The court held that the regime for planning permission and building regulations were entirely separate in purpose, legislation and enforcement. There was no mention of compliance with building regulations in the Overage Agreement. It was decided that both parties had attributed significant value to the receipt of the prior approval and the argument from L&I that the prior approval was of no value unless it related to the Residential Units that were capable of being built. In addition, both parties were experienced developers.

Always seek professional advice

This case highlights how imperative it is for professional advice to be taken when entering into an overage agreement and developers should be aware of this predicament when agreeing the heads of terms with the other party.

If you would like advice or guidance on Overage Agreements, or alternatively any aspect pertaining to commercial property or land development, please contact Jo Pusey, Associate Partner and Head of Commercial Property in Northampton on 01604 828282 or jo.pusey@franklins-sols.co.uk.

Disclaimer: The information provided on this blog is for general informational purposes only and is accurate as of the date of publication. It should not be construed as legal advice. Laws and regulations may change, and the content may not reflect the most current legal developments. We recommend consulting with a qualified solicitor for specific legal guidance tailored to your situation.