Property developers should be aware that a recent Court of Appeal case has shown that between two sophisticated, professionally-advised developers, a Court is likely to strictly and literally interpret the provisions of an overage agreement.
In this case, developer, London & Ilford (L&I) bought Arodene House in London from Sovereign Property Holdings (Sovereign). Arodene House was an 8-storey building, primarily consisting of office space. L&I intended to redevelop the space into residential units. L&I paid approximately £7 million for the property and executed an overage agreement that included extra payments on the occurrence of trigger events that occurred within the specified period.
The Overage Agreement
In the overage agreement, L&I was obliged to pay Sovereign £750,000 if, within the specified period, the local planning authority approved the change of use of the property from office space to residential units. Prior approval by the local planning authority was concerned with the change of use of the property only and not with the building works required to put the change of use into effect.
The local planning authority provided the relevant approval well within the period set out in the overage agreement. On that basis, Sovereign argued that the first trigger event had occurred and L&I became liable to pay Sovereign £750,000.
The Overage Dispute
L&I denied the claim, stating that while the planning requirements were satisfied, not all of the flats could be lawfully built because they would contravene building regulations. L&I argued that the first trigger event should be construed as referring to residential units that were capable of being built.
Strict Contractual Interpretation
The Court disagreed. The Court emphasised that the regime for planning and development consent is entirely different from the regime surrounding building regulations. The definition of the trigger event included only planning and development consent. The Court stated that if the parties had intended for the trigger event to include compliance with building regulations, then, given the experience of the parties and their advisers, the parties would have made that explicit. They did not.
The lesson for property developers is clear. Never assume that any term or obligation in an overage agreement, or indeed, any agreement, will be implied. Anything that must happen, must be drafted clearly. In this case, if L&I had intended the trigger event to include the requirement that the residential units were capable of being built, then the drafting should have included planning consent and everything else needed to happen to ensure that the buildings were capable of being built.
Clearly, to avoid costly errors, developers will need to use experienced professional advisers when drafting and negotiating agreements. Equally important, however, is for developers to clearly communicate their entire vision to their advisers. This will help to ensure that advisers are fully informed and will be able to draft as comprehensively as necessary to achieve the developer’s vision.
For more information please contact Elizabeth Deyong.
Disclaimer: While we do all that is possible in terms of ensuring its accuracy, this article contains general information only. Nothing in this article constitutes legal advice. You need to consult a suitably qualified lawyer from the firm on any specific legal problem or matter
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