Overage Clauses

 

Every seller wants to achieve the best possible price on a sale.  In the commercial property market sellers can be reluctant to agree a sale for fear of cashing out prematurely.  This is where overage clauses could provide some comfort and benefit to a seller.

Overage provisions can enable a seller to sell now while enjoying a potential uplift payment on the future value of that property.  Such provisions would place an obligation on the buyer to make a further top-up payment to the seller on the occurrence of an agreed trigger event, such as the grant or implementation of planning permission or future disposal.

It is not quite so simple, however.  Getting the drafting right is key to ensure that a buyer cannot circumvent their obligation to pay. There is a risk that if the provisions are not tightly enough drafted, buyers will explore means to avoid or reduce the payment.  For example, in the case of Bride Hall Estates Ltd v St George North London Ltd [2004] the seller lost nearly £300,000 in payment due to a drafting ambiguity in relation to whether car park spaces formed part of the ‘residential units’ that were the subject of the overage provisions.

In Renewal Leeds Ltd v Lowey Properties Ltd [2010] the overage payment was due on the sale of the last house in a development site. To avoid payment, the buyer left the last four houses unsold. There was no express obligation included in the contract which required the buyer to build, or indeed sell, any houses.  However, in this case, the Court determined that there should be implied into the drafting a provision that the development, if commenced, would have been expected to be completed. Courts are often reluctant to imply terms into contracts which have been negotiated between the parties.  While the decision in this case benefited the seller, it would be foolish to expect Courts to regularly ride to the rescue.  This highlights the importance of careful drafting.

A further key consideration for a seller is to ensure that the overage payment is made upon a trigger event. There are a range of methods to secure payment and a solicitor can consider and advise which of these may be appropriate to a particular situation.

While great care has been taken in the preparation of the content of this article, it does not purport to be a comprehensive statement of the relevant law and full professional advice should be taken before any action is taken in reliance on any item covered.