How to future-proof overage provisions

In the first part of the series, we explored the basics of an effective overage deed. This included the drafting of a suitable trigger event, payment calculation and duration provisions. In this part, we will delve into the fourth of the overage mainstays – security. As alluded to in our previous issue, the interests protected by an overage deed can be intended to apply for decades. Solicitors must be forward-thinking in order to ensure that the relevant provisions survive the test of time. This article will consider some of the ways an overage deed can be effectively protected. The deed itself? Before delving into the different means of securing overage provisions, it is worth considering whether any additional protection is required at all. A properly executed overage deed will include a commitment by the buyer to make a payment to the seller on the exercise of a trigger event (ie, the grant of planning permission, the disposal of the land, etc). Can sellers rely on this contractual obligation alone to protect their interests in the long-term? In answering this question, sellers must first ponder how long they expect the overage’s obligations to apply. This is because sellers may have a hard time in passing on their interests in the future. While, in the absence of an express restriction in the overage deed, the luxury of receiving payment for a triggered overage provision can be assigned from party to party, the buyer’s obligation to pay up cannot be. As most law students will know, this is because only the benefit of a positive contractual provision can be assigned under English law – not the burden. Furthermore, from a land law perspective, the burden of a positive covenant to make a payment does not “run with the land” and bind successors in title to the land in question. If relying solely on the deed itself, sellers will also be dependent on the buyer’s financial wellbeing and ability to make the payment for years to come. While the risk of its insolvency can perhaps be averted by the inclusion of a guarantor (especially when the buyer forms a part of a larger corporate structure), it is always prudent for a seller and its representatives to investigate the covenant strength of a buyer before opting for such course. Protection at HM Land Registry: covenants and restrictions To effectively future-proof and secure an overage payment, there are various options that sellers and their solicitors ought to consider. Perhaps the most common method of securing an overage payment is by imposing a contractual obligation on the buyer in the overage deed not to dispose of the land without providing the seller with a deed of covenant from its disponee, where the disponee covenants directly with the original seller to make the overage payment when it becomes payable. That obligation is then protected by the placing of a restriction on the buyer’s new title following the sale. This can be entered in the proprietorship register as a Land Registry standard form L restriction (for dispositions by registered proprietors where a certificate is required), found in the Land Registration Rules 2003. For example, no disposition of the registered estate by the proprietor of the registered estate is to be registered without a certificate signed by [the Seller] or their conveyancer that the provisions of [the relevant clauses of the overage deed requiring the deed of covenant to be provided] have been complied with or that they do not apply to the disposition. These restrictions mean that a future buyer cannot register its new interest in the relevant land, and become legal owner, until a deed of covenant has been provided to the original seller as beneficiary of the overage obligations. Once the deed of covenant is provided, the relevant “certificate of compliance” can be passed on from the original seller or its conveyancer and the new buyer can register its interest in the land. Are there any circumstances where the above restriction may not sufficiently future-proof a seller’s interest? For instance, what if a seller passes away after the overage deed takes effect but before the buyer disposes of the land? Land Registry Practice Guide 19 declares that an onerous cancellation application must be made if a restriction does not make provision for the seller’s successors, followed by a simultaneous application for its re-entry. It states: “Where a restrictioner has died and the terms of the restriction do not indicate that it will end upon death, or who is to have the benefit after death, then in practice it will usually be impossible to withdraw the restriction. Application must be made for its cancellation.” Solicitors should therefore be forward-thinking in the initial drafting of the overage deed and restriction on title. For instance, if the seller is a private individual and is to be listed on the restriction as the party providing the certificate of compliance, adding “or their personal representatives” can save a lot of hassle for the parties moving forward in the event of their death. If multiple parties benefit from the restriction, the addition of “or the survivor of them” grants a similar solution. Charges For sellers, a charge is another means of securing an overage payment for the long-term future. Until a buyer performs its obligations under the original overage deed, the seller will retain an interest in the land. If there is a failure to perform altogether, the seller may take possession of the land itself or force a sale to ensure the recovery of the overage payment. Buyers will want to resist protection by way of charge. Even if agreeable in principle, the buyer will need the go-ahead of any lenders who are to take a charge over a buyer’s future development. The existence of a charge in favour of the beneficiary of the overage deed is likely to dissuade any other incoming sources of a funding, causing problems for a buyer if it requires funding, for development or otherwise, in the future. Charges might be the option of choice for sophisticated sellers – especially if they are publicly owned and have access to their own legal counsel. They are particularly attractive to sellers in higher-value (and higher-risk) sales. Ransom strips There are other more imaginative means of securing an overage payment. This includes the well-known “ransom strip” alluded to in our previous article. These often small, but significant parcels can be strategically placed in areas essential for the development or re-development of land. For instance, this can be land which grants access to the public highway or important utilities. Retaining control over a ransom strip can provide security as the development may not be able to proceed without the subsequent sale of, or grant of rights over, the strip. A successful ransom strip will depend on a complete understanding of the land in question. The strip will be redundant if buyers negotiate access to the development via neighbouring properties. Sellers will also need to take heed of the possibility that buyers could even gain adverse possession rights, if they reside on the development long enough. Restrictive covenants A similar form of protection is the reliable restrictive covenant. On a sale, the buyer will covenant that it will not develop the relevant land (or use it for any use other than, say, agricultural activities). Done properly, the restrictive covenant will run with the land and bind the buyer’s successors in title. The seller can then charge a payment to release the covenant to allow development. While certainly simple in theory, sellers will need to take into account a few considerations before pressing forward. For instance, the covenant must of course benefit land, meaning at the very least that the seller must retain an interest in some land. The covenant must also be restrictive in nature, meaning that an obligation for the buyer to pay the overage itself will not cut it. A well-known example of the courts taking a hard line on whether a restrictive covenant actually benefited land occurred in Cosmichome Ltd v Southampton City Council [2013] EWHC 1378 (Ch); [2014] 1 EGLR 171. It was held that a covenant by the BBC to stay within Southampton’s Cultural Quarter was not a restrictive covenant at all as it could not benefit the “nature, quality, amenity and value” of council land. The covenant was actually a mechanism for extracting payment should the BBC relocate, and therefore unenforceable as a restrictive covenant. Foresight and understanding are key There are a number of options to secure an overage payment, each with their own advantages and disadvantages. Solicitors will therefore need to be strategic in order to find the right means of protection in the circumstances. Foresight will of course be important to ensure that arrangements endure throughout the years. What remains crucial, however, is a clear understanding of one’s clients, the land they hold, and the third-party interests at play. Anthony Grogan is a trainee solicitor and David Herbert is a legal director in the real estate development team at Brabners Image © Shazaf Zafar/Unsplash