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Selling or Buying Land for Development? Beware of This Potential Minefield

on Friday, 20 July 2018.

When land is sold for development, buyer and seller often agree on an arrangement called an 'overage'. An overage allows the buyer to pay more money at a future date if a 'trigger' point is reached.

This device is used for a variety of commercial reasons: maybe the buyer cannot come up with the full amount of money that the seller thinks the development site is worth, or it could be to avoid embarrassing the seller if the buyer were to achieve a much more valuable planning permission after completion, that increased the value of the land.

Arguments often develop after completion as to whether or not the overage payment should be made. This was illustrated in a recent legal case. London and Ilford Limited, the developer, purchased a property from Sovereign Property Holdings Limited. The overage agreement required the developer to pay £750,000 if a 'first trigger event' occurred during the overage period.

The definition of the first trigger event was the receipt of approval from the local planning authority for the development of 60 residential units at the property. Approval was obtained within the overage period and the seller claimed the sum of £750,000.

However, it had transpired that construction of the full number of flats would contravene the building regulations because of incompatibility with fire escape provisions. The developer subsequently refused to pay the overage, arguing that its purpose was to provide a commercially valuable benefit and that approval from the local authority was valuable only if the 60 units could be lawfully built.

The court rejected the buyer's argument and ordered that the overage payment of £750,000 be paid.

Overage clauses are fraught with difficulty and need to be drafted very carefully. All possible scenarios have to be taken into account.


For more information, please contact David Marsden in our Commercial Property team in Watford on 01923 919 303.

 

This article first appeared in the Watford Observer.

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