What is overage clause

After considering the evidence at length, he came to the conclusion that the Payer had not proved either of its alternative rectification cases with sufficient clarity, and accordingly dismissed the claim. The Payer unsuccessfully appealed to the Court of Appeal, which dismissed the appeal by a majority of However, their appeal to the House of Lords was successful, their Lordships being unanimous, with the leading judgment being given by Lord Hoffman who was giving his last judgment in the House of Lords.

These requirements had been satisfied in this case, as the formula contained a grammatical ambiguity that had to be resolved by considering the business purpose of the provision. Lord Hoffman dealt with two important issues in his judgment, namely 1 construction and 2 rectification. The parties had argued over whether or not the court should take into account pre-contractual negotiations.

Lord Hoffman accepted that, in principle, previous negotiations were relevant background on an issue of construction ; the general rule is that there are no conceptual limits to what can properly be regarded as background. However , construction required an objective approach. Statements made in the course of pre-contractual negotiations were likely to be "drenched in subjectivity".

Lord Hoffman considered that, if the exclusionary rule which excludes consideration of pre-contractual negotiations were abandoned, there was likely to be greater uncertainty of outcome in disputes over contractual interpretation.

Reviewing evidence of pre-contractual negotiations would add to the cost and duration of resolving such disputes. To disapply the exclusionary rule would have required the House of Lords to depart from a long and consistent line of authority. The House of Lords had the power to depart from an established rule under Practice Statement Judicial Precedent [] 1 WLR , but this power was intended to apply where previous decisions of the House of Lords were impeding the proper development of the law or had led to results which were unjust or contrary to public policy.

Lord Hoffman concluded that no case had been established for departing from the exclusionary rule. Further, no exception to the exclusionary rule applied in this particular case. The exclusionary rule does not cause injustice because of two legitimate "safety devices"; in claims for rectification and estoppel by convention, evidence of pre-contractual negotiations is admissible.

The Payer had put forward an alternative argument, i. In considering this, Lord Hoffman reviewed the relevant pre-contractual exchanges between the parties. He held that it was clear that a reasonable person reading the evidence in light of the background known to the parties, would have taken the parties to have intended that the overage should only be payable if, and only if, the project performed better than was anticipated at the time of the contract.

This presumed intention supported the Payer's case and was evidenced by a particular letter. Lord Hoffman found no evidence of subsequent discussions which might have suggested an intention to depart from the terms of the letter. If the proper construction of the overage provisions, as drafted, was in the Payee's favour, both parties had been mistaken in thinking that the definition reflected their prior consensus; and the Payer would have been entitled to rectification.

However, the Payer's appeal on the grounds of construction had already been allowed. It should be noted that since this case the Supreme Court in Arnold v Britton has said that So where the language is clear less weight will be attached to "commercial common sense" when interpreting contractual clauses. Unfortunately, when the flat ceased to be used by a resident porter, the buyer was unable to sell it on the open market, as the tenants had exercised their collective enfranchisement rights under the Leasehold Reform, Housing and Urban Development Act, and the Act prohibited the flat from being sold.

However, Henderson J. A statutory provision that the parties had had no chance of predicting in frustrated the overage arrangements. However, the court held that a term should be implied into the option agreement, obliging B to market and sell each newly constructed house within a reasonable time of the option having been exercised and the planning permission having been obtained.

Despite the fact that the proposed clause referred to a "reasonable time", the judge did not consider this term too imprecise to be implied. It was appropriate to allow the buyer some flexibility to take account of market conditions, and the fact that the clause required the weigh-ing of various factors did not automatically render it incapable of being implied.

The judge made a decree for specific performance, adjourning the exact wording of the order to be determined by the Master. The trigger date for payment of overage occurred just after the longstop date, so that no overage was payable. I cannot assume legal responsibility for the accuracy of any particular statement, as the advice is on a non-specific basis.

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Join Books Shop all Boundaries and party walls Commercial leases Commons and village greens Conveyancing and property development Easements Long leases and enfranchisement Mortgage Residential tenancies Restrictive covenants. Introduction What is "overage"? This will be particularly useful in the case of a vendor who is anxious not to be embarrassed by being seen to have sold at an undervalue, such as a local authority or charity. There are five main constituent elements of an overage clause, namely: Duration What will trigger the payment?

How much will the payment be, and how will it be calculated? Will making a payment release the obligation? Duration The duration of an overage clause normally depends on the nature of the event which will trigger the payment, and the likely timescale for this to occur. Generally the starting point will be the grant of planning permission in respect of the relevant land - but there are many additional details to consider, including: Should the trigger for payment of overage be outline or detailed planning permission?

Or should a resolution to grant planning permission be sufficient? Or even a change in the relevant Local Plan? What happens if the planning permission is never implemented? If you would like expert advice, please contact our Head of Commercial Property , Caroline by email or phone for a free, no obligation discussion about securing your investment. Trends in the value of land in the UK.

Infrastructure investment and the increase in land and property values. Business Enquiry Personal Enquiry Other. Overage agreements — what are they and why is their popularity on the rise? What is an overage agreement? What conditions can apply? Sellers may receive a share of profits in scenarios where specific conditions apply, which can include: The grant of a new planning permission. The grant of planning permission for a new use of the land.

The construction of houses which exceeds the specified number, or commercial development on the land which is larger than specified. The on-sale of the land in its present state, where the vendor fears that the purchaser may take advantage of a rapidly rising market to make a quick profit from the land.

However, some thought should also be given to what happens if a lease is granted. A distinction may need to be applied between long term leases granted for a premium, and shorter term leases granted at a market rent. Developers may wish to exclude the latter, but sellers would want to include the former to ensure that a buyer cannot avoid the overage payment by granting a long lease for a premium and then the long tenant carrying out the development instead.

Developers would also want to exclude the grant of easements, leases or transfers to utility providers as typically these will be for no value but would also be necessary as part of the wider development. The grant of mortgages or charges to lenders is another typical exception requested by developers, as lenders are unlikely to enter into the necessary deed of covenant confirming they will be bound by the overage.

When drafting the agreement, you should ensure that any disposals by a lender exercising the power of sale trigger the overage so that restrictions should reflect this. In addition, consideration should be made of whether the overage falls away once a disposal has been made, and any overage payment has been paid, or whether the overage should bind the land for the duration of the overage agreement.

In the latter case, there could be multiple triggers down the line for subsequent developments and, unsurprisingly, this is an option that developers do not favour. Once it is established that overage has been triggered by a developer and that a payment is due, the level of payment must be calculated. In higher value disposals, this is where a significant portion of the negotiations are likely to take place and expert advice should be obtained to ensure that the maximum value or simply a fair value is extracted from the developer.

It is quite common to link the payment to the increase in the market value to the property resulting from the relevant trigger event. The parties would agree to value the property as at the date that the overage payment is triggered, once with the benefit of the planning permission, once without the benefit of the planning permission, and the difference in the two values used for the purpose of calculating the overage payment.

An alternative mechanism is for a payment to be made by reference to profit or revenue received by a developer due to carrying out the development. It is therefore essential that an adequate dispute resolution clause is inserted into the contract to deal with situations where there the parties cannot agree. There is also likely to be extensive debate about the development costs that can be deducted before the overage payment is made. It is not unreasonable for certain costs to be deducted, as a developer incurs them to achieve the increased value or the revenue that the previous landowner is seeking to benefit from.

However, careful thought needs to be placed on those costs that can be deducted, and who determines those costs. If a developer is given free rein to deduct any costs at its discretion, then there is a risk that some costs are included that were not essential to achieve the increased value.

Great care needs to be taken over any formulae used in calculating the eventual payment, particularly on larger development where there are a number of factors taken into account when calculating the overage.

In this case the overage formula was so complicated that no one noticed when part of the formula was missed off on the twelfth round of negotiations, which resulted in an unexpected windfall for the seller.

There is certainly no such thing as a one-size fits all overage agreement and so adequate time and thought needs to be applied to negotiations of all parts of the overage, not just the payment percentage. Other key elements of an agreement to be considered:. Particularly in the case of more complicated overage agreements, it is worth getting advice from land agents, valuers and solicitors during the heads of terms stage to ensure all issues are covered off early on, rather than during the drafting of the documents, which can cause delays later on in the deal.

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On 9 November , the government gave its first reading of the new Commercial Rent Coronavirus Bill and updated its Code of Practice introduced to deal with the commercial rent arrears accrued during the pandemic. If interest is payable on the overage payment, make sure this runs only from when the overage payment has been agreed or determined by the independent surveyor. If interest runs from the date of the permission, this can give rise to a big interest bill whilst the price is being sorted out.

Will the seller have more than one bite of the cherry? Most overage clauses apply each time planning permission is obtained during the overage period. So, if a previous overage payment has been made based on a permission for, say, 5 houses, a further payment will be due if permission is subsequently obtained for 10 houses. It is important to ensure that the credit is given only for the first overage payment.

How is the overage secured? A restriction can, however, cause problems or delays on future dealings and a buyer should try to exclude remortgages and short-term leases from such a restriction. Sometimes the seller requires a charge back over the property to secure payment of the overage.

A buyer should resist this, particularly if they are raising finance through a bank to purchase the property. The bank will want a first charge and may not be happy for the seller to have even a second charge.

The benefit of the overage is an asset. This can be sold by the seller or, if the seller passes away, the benefit may pass with their estate.