A different perspective on overage

Peta Dollar concludes her look at overage – this time exploring the topic from the buyer’s viewpoint. A buyer of land may be required by the seller, in addition to the purchase price, to pay “overage” after completion, particularly if the land has development potential. If the seller is obliged to sell at the best possible price, as in the case of a local authority or a charity, overage may be required if the sale is to be valid. The buyer will wish to avoid paying overage if possible, or at least to limit the amount payable and the circumstances in which it may become payable. The main issues to be dealt with when reviewing (or drafting) overage provisions on behalf of a buyer of land are: the overage period; the trigger event(s); how to calculate the overage; and how the overage should be secured. Overage period Most overage provisions provide for the payment of overage where a trigger event occurs during the “overage period”. The buyer will want that period to be as short as possible, although it needs to continue for more than six months after completion if the buyer is to be able to defer payment of stamp duty land tax on the overage. Trigger event(s): planning Where a trigger event relates to planning, the trigger for payment of overage should never simply be the grant of planning permission, as: Planning permission may be quashed following a successful third-party challenge; Planning permission may not be capable of being implemented – see London and Ilford Ltd v Sovereign Property Holdings Ltd [2018] EWCA Civ 1618; [2018] PLSCS 126, where the developer was unable to implement the permission but was still obliged to pay overage; or The seller may apply for a “better” planning permission that the buyer may not want – ensure that only permission granted pursuant to the buyer’s application triggers overage. The definition of “planning permission” should be confined to one that is “satisfactory” to the buyer (or one that contains no “onerous condition” (as defined)). Careful defining of “onerous condition” may avoid payment of overage altogether – see Rentokil Initial 1927 plc v Goodman Derrick LLP [2014] EWHC 2994 (Ch); [2014] PLSCS 254. Planning permission should be carefully defined – see Loxleigh Investments Ltd v Dartford Borough Council [2019] EWHC 1274 (Ch); [2019] PLSCS 97, in which approval of reserved matters pursuant to an outline planning permission granted before completion and permission to vary a condition of the outline planning permission were both held to constitute “planning permission”. If planning permission is granted more than once during the overage period, the drafting should make it clear whether or not overage will be payable each time it is granted or only on the first occasion. The buyer should be careful to avoid double-counting of the increase in value – the existence of the first planning permission must be taken into account when valuing the land with the benefit of the second planning permission. Trigger event(s): sale If the land is sold to a third party before planning permission is granted, the buyer should be released from the obligation to pay overage when the third party enters into a contractual obligation with the original seller to pay the overage. Careful drafting of the definition of “sale” may enable the buyer to avoid paying overage; in particular, where the buyer is a non-natural person, such as a company, and sale of its shares is not included within the definition. Certain disposals should be excluded, such as: the transfer of roads and other infrastructure or public open space to a public authority or utility company; a mortgage or charge over the land; and where appropriate, individual plot sales. In the case of a disposal that may not be at arm’s length, the buyer should resist any attempt to substitute market value for actual sale proceeds, as this may be particularly unfortunate for the buyer in a rapidly rising market. The sale of a dwelling unit developed on the land may be a trigger for payment of overage. One of the main issues that will arise will be the question of how “dwelling unit” should be defined, including: The buyer will want to exclude affordable housing units if possible, particularly social housing for rent, which may have to be transferred to a registered provider free of charge; Some or all sheltered housing units may be able to be excluded – but see Harris v Berkeley (Strategic Land) Ltd [2014] EWHC 3355 (Ch); [2014] PLSCS 283; It may be appropriate to exclude holiday accommodation – see Walker v Kenley [2008] EWHC 370; [2008] PLSCS 52; and If overage is payable based simply on the number of units, the extra value from larger units will not be captured in the overage payment. It is not uncommon, where the buyer is a housebuilder, for the trigger for payment of overage to be the sale of the last house within the development. In such a case, it has been known for a housebuilder never to sell the last house, just to avoid the payment, but the courts may imply additional obligations on the buyer – see Renewal Leeds Ltd v Lowry Properties Ltd [2010] EWHC 2902 (Ch); [2011] PLSCS 22 and Sparks v Biden [2017] EWHC 1994 (Ch); [2017] PLSCS 170. Where the buyer is doing a “build to rent” development but overage is payable if there is ever a sale, it is important to make it clear that there is no obligation on the buyer to sell at any time. Other trigger events Overage can also be tied to: Commencement of development – see section 56 of the Town and Country Planning Act 1990. Be careful that intrusive environmental surveys and archaeological investigations do not trigger payment of overage prematurely; Completion of development – be careful of paying overage on separate phases, as a successful first phase could lead to overpayment in relation to the development as a whole. Whatever the trigger(s) for payment of overage, make sure that the buyer will have the means to make payment when due – grant of an improved planning permission does not necessarily produce immediate cash in hand. Calculation of overage Most basic overage calculations are based on a formula where the original sale price is deducted from the price/value when the trigger event occurs. The formula should be kept as simple as possible and a worked example may be helpful to ensure that the formula works as expected. Where land is being valued with and without planning permission, or with one permission and then with a different (improved) permission, the valuation date should be the same in each case, otherwise part of the overage payment will relate to inflation and/or increase in land values. If the calculation of the initial land value does not disregard any hope or expectation of the grant of planning permission, or of an improved planning permission, the overage payment will be reduced – but see Walton Homes Ltd v Staffordshire CC [2013] EWHC 2554 (Ch); [2013] PLSCS 231, which clearly shows that a court will normally find in favour of a local authority where poor drafting may otherwise reduce the overage payment. It is important to ensure that all buyer costs are deducted within the calculation, including the cost of any section 106 obligations, community infrastructure levy and planning costs. It may be possible to reduce the overage payment by making deductions more than once, where the RICS Red Book guidelines specify a particular deduction but the drafting also specifically deducts the item. Remember that compulsory purchase/enfranchisement compensation will normally be lower than market value – see Hildron Finance Ltd v Sunley Holdings Limited [2010] EWHC 1681 (Ch); [2010] 3 EGLR 1 – and allow for this in the drafting. The treatment of overage payments for VAT purposes will generally, but not always, be the same as the treatment of the purchase price. Make sure that any VAT added to overage payments has been correctly added – a VAT invoice from the seller is not conclusive evidence of this. Securing overage Where overage is to be secured by a guarantee that comes from a bank or other financial institution, this will be costly for the buyer and should be resisted. Most developers will charge the land as security for the purchase price and/or build costs, so only a second charge will be available for the seller (and some banks may resist a subsequent charge altogether). Ensure that any charge does not contain onerous obligations – a standard “all monies” charge is not appropriate. Some major lenders will not lend on a property subject to overage. Where a positive covenant to pay plus restriction is used: Beware of the seller’s administrative costs – these should, where possible, be capped; Beware of delays – try to ensure that the buyer’s solicitor can sign off, but if this cannot be agreed, try to ensure that there is at least an obligation to keep contact details up to date; Require the updating of the register as a condition of permitting an assignment of the right to receive overage. Do not agree a ransom strip where this may interfere with the buyer carrying out the development. A building lease should only be accepted where the seller is a local authority. Peta Dollar is a freelance lecturer, trainer and writer Photo © Herbert Bieser/Pixabay