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Business Law: Toby Pound on the potential pitfalls of ‘overage’ clauses in land sales

PUBLISHED: 17:34 12 October 2017 | UPDATED: 17:37 12 October 2017

Toby Pound, partner at Barker Gotelee.
Picture: Pagepix

Toby Pound, partner at Barker Gotelee. Picture: Pagepix

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Driving through the Suffolk countryside, it is noticeable how many new housing developments are springing up on the edge of towns and villages.

Where previously the village “envelope” would have prevented housing on open fields, the demand for new housing and the relaxation of planning controls has spawned a rash of schemes in unexpected locations.

For the landowner, this can often produce a cash windfall but the relaxation of planning control can also create uncertainty in the farmland market. If I sell farmland now, will my buyer cash in five years’ time?

The solution to this problem is often solved by imposing an “overage” obligation on the buyer, involving an additional sum of money to be paid to the seller in the future if the buyer or a future owner obtains planning permission to develop. Many overage arrangements run for 25 years or more to protect the seller from losing out on any cash windfall. The trigger for an overage payment will usually be either the grant of a planning permission or its implementation when a developer actually makes a start.

Overage covenants need to be carefully drafted to anticipate all possible outcomes. In the recent case of Sparks v Biden, the overage agreement required the buyer to apply for and obtain planning permission for a residential development, but with no obligation to market or sell the houses once built. The buyer attempted to use this omission to his advantage by occupying one of the houses and letting the others out. He argued that he could delay his obligation to pay overage indefinitely.

The High Court took the unusual step to imply into the overage agreement a term requiring the buyer to market and sell the properties within a reasonable time. The court held that without the implied term, the agreement would lack practical or commercial sense.

This decision highlights the need when negotiating overage provisions to consider every aspect of the development process and to draft the document accordingly. When deciding whether to imply a term into a legal agreement, the court will look very carefully at the circumstances and will apply stringent criteria, particularly where it has been heavily negotiated.

There is no guarantee the court will come to the rescue of a party who finds himself at a disadvantage.

•Toby Pound, is a partner and property law specialist at Barker Gotelee.

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