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31st October 2019

Overage payments may be triggered even when developments are not viable

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A recent Court of Appeal decision centred upon an overage agreement made between two experienced developers. The seller agreed to sell the mixed-use building to the buyer, who intended to change the buildings use and create residential units. The parties entered into an overage agreement under which approval from the local planning authority for the change of use was the trigger event. Whilst the buyer received approval for the proposed change of use, its plans to turn the current space into residential units were incompatible with building regulations. Several of the units would contravene building regulation provision for emergency fire exits, meaning that the development in its intended form was not viable.

The seller requested the agreed payment under the overage agreement, on the basis that the change of use had been granted. However, the buyer argued that the payment was not triggered solely by the approval of change of use. It argued that it was also necessary for there to be a “commercially valuable benefit”. The buyer stated that this requirement was clear in the agreement because it stated that the change of use was to residential units “for residential use for sale or letting.”. Without building regulations approval, the buyer argued that there would be no use for sale or letting and therefore, no commercially valuable benefit in the development, so the trigger event had not occurred, and the overage payment was not due.

The court decided in the seller’s favour, finding that the overage agreement provided payment was due when planning permission for change of use was granted. This judgment was upheld by the Court of Appeal, where reference was made to the fact that both parties were experienced property professionals and that the buyer had an opportunity to confirm whether the development was viable prior to entering into the overage agreement. Additionally, the agreement was clear that the trigger for payment was planning permission for change of use. Building regulations are separate to planning approval and both parties, as experienced developers, knew this. The inclusion of the wording that it was the intention for the properties to be for residential sale or letting was insufficient to imply a term that the trigger payment was conditional upon the buyer being able to create units for sale or letting.

This decision is a clear reminder that trigger events are not automatically conditional upon the viability of a project. Instead, it is vital for any developer intending to enter into an overage agreement to ensure that any trigger for an overage payment is not triggered until the profits from the development are realised.

For further information on this or other property development matters please contact Ceri Riddell on 01223 532753 or click here to email Ceri.