Commercial Property Update: Overage Agreements
Due to recent case law, overage agreements is currently a hot topic for real estate lawyers.
The use of overage agreements in Commercial Property details a situation whereby it entitles the Seller to receive additional payment from a Buyer if the land which was purchased subsequently increases in value e.g. either through development or simply the obtaining of planning permission. It is important from a business perspective, as overage obligations enable contractual parties to apportion the risks in transactions and may assist with cash flow in a development project.
The latest case on this subject is London and Ilford Ltd v Sovereign Property Holdings Ltd EWCA Civ. The trigger event under the overage agreement was on the receipt of approval from the local planning authority for the development of 60 residential units on the plot. This was received, however it later transpired that such a development would contravene building regulations due to fire escape issues. It was ruled that even though the commercial aim was not achieved in that it would not be possible to construct the units – the receipt of the approval (as stipulated) was enough to trigger payment. Based on the drafting of the agreement (which did not need compliance with building regulations or other requirements to enable the actual units to be built) and the fact parties were both experienced corporate entities who were legally advised – the developers were ordered to pay the overage payment.
There are a lot of issues to look out for when drafting overage agreements and once in place, the party who benefits should consider protecting their interests by way of a restriction on the title – obtaining legal advice on this should be beneficial to ensure the agreement facilities parties’ wishes.
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