Overage Agreement explained in light of recent High Court ruling

builders on building siteProperties and land are often sold if there is a potential for increased value with an overage agreement.

Case law has recently addressed the clause that is often used: “detailed planning permission” which is not defined in a planning law sense, with defining consequences for many overage agreements.

What is an Overage Agreement ?

This is an agreement that the buyer will purchase a legal estate (property, land or other legal estate) and agrees to pay extra when a specific event happens which is usually with land or property when an increase in value is obtained by the approval of a planning permission.

An example of this would be where a house is sold with a paddock upon which is a stable that might get planning permission for a further residential property. This might significantly increase the value of the paddock.

An overage agreement in this scenario enables the seller to benefit from an increase in the value of the property after it is sold but also benefits the purchaser enabling them to buy the property at a lower price, based on its existing use.  The purchaser knows that they have the opportunity of increasing the value, albeit that some of that value added is passed on to the original owner.

Specific terms are agreed in overage agreements that usually include:

  • An allowance or formula for the deduction of the costs incurred to get the increase in value (often planning permission approval).
  • A definition of what the overage is validated for (an extra stable may not constitute or trigger a payment, but a house might).
  • Confirmation of how many triggers for overage there may be. (If the paddock was made into ten housing units, would the trigger be on permission for all or when each new property was started, finished or sold or when planning permission was approved?)
  • What is the trigger point if the property is sold?
  • What is the trigger for the sale of sub-rights (e.g, the sale of easements, wayleaves, rights of way or other rights affecting the land).
  • Is the trigger time sensitive?
  • How is the legal aspect of the overage agreement confirmed (e.g, legal charge, positive covenant and a contract, etc).

Usually the fundamental overage is agreed on a split of the percentage uplift and this is usually triggered on a specific event.  This is often defined in land and property overage agreements as the awarding of “detailed planning permission”.

But what does “Detailed Planning Permission” mean?

A definition of Detailed Planning Permission has been tested in the courts in the case of Loxleigh Investments Ltd V Dartford Borough Council (2019) EWHC 1274 July 2019.

A plot of land owned by Dartford Borough Council was granted outline planning permission for five detached houses in 2012.

An overage agreement was entered into when Loxleigh Investments Ltd purchased the land agreeing to make an overage agreement if “any detailed planning permission” was granted that would enable the new owner or a subsequent owner to build any structure within excess of 3,000 square feet.

In 2015, Loxleigh Investments Ltd obtained variation to the planning permission, to build four houses in excess of 3,000 square feet. Detailed planning permission would still be required before construction could commence.

The High Court in England and Wales was required to rule most importantly on whether the “detailed planning permissions” term in the overage agreement had been triggered for payment.

Whilst it confirmed that the term was not defined in any legislation, it is commonly used. The High Court determined that, if the parties intend “detailed planning permissions” to mean a permission granted pursuant to a full, detailed application where no matters are intended to be left outstanding, the parties should specifically and expressly say so. 

The Court therefore ruled in favour of Dartford Borough Council and the overage payment was triggered and enacted.

As ever with legal issues concerning any property or any similar aspect, we recommend that individual Legal and Surveying advice is obtained.

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