Timing is the golden rule of overage
Whether you use the term ‘overage’, ‘claw-back’ or ‘uplift’, you’re talking essentially about the same thing – additional payments made to a land seller after the land has been sold.
With overage conditions in place, a buyer is obliged to pay the seller a percentage increase in the value of the land once the land has been seen to increase in value. An example of a ‘trigger event’ might be the time a planning permission is obtained by the buyer.
Overage is notoriously a complex area of property law and the timing of payments is often the most contested.
Property developers who have contracted to use reasonable endeavours to attain a particular outcome as soon as reasonably practicable should sit up and take notice of the recent court ruling in Gaia Ventures v Abbeygate Helical (Leisure Plaza) Ltd.
Abbeygate (the developer) had entered into a series of conditional agreements in relation to site assembly for a proposed development. Some of the agreements were conditional on other agreements for the site assembly. Under one of the agreements, Abbeygate agreed to pay Gaia Ventures an overage sum of £1.4m on the trigger date.
Under the terms of the agreement, the trigger date was defined as “the date upon which an “Acceptable Planning Permission” became immune from challenge”. Another condition of the overage agreement related to the completion of the site assembly by Abbeygate. The overage agreement provided that the trigger date would be postponed until 10 working days after the satisfaction of the site assembly condition.
The definition of “Acceptable Planning Permission” was actually weighted in Abbeygate’s favour as it was defined as one granted on terms and subject to conditions which in its reasonable opinion are acceptable and commercially viable. Abbeygate was contractually obliged to “use its reasonable endeavours” to obtain such a planning permission.
In relation to the site assembly condition, Abbeygate essentially agreed to commence and thereafter use reasonable endeavours to negotiate and agree terms with the parties entitled to the properties/interests it needed to acquire. The overage agreement stated that Abbeygate had to do this “as soon as it considers it strategically advisable to do so”.
The overage clause included a longstop date, the effect of which was that the trigger date could not be a date more than 10 years after the date of the agreement. The longstop date in this case was effectively 4 July 2013.
Unsurprisingly, as the longstop date loomed large under the overage agreement, Abbeygate decided that it was in its financial interest to employ a tactic of delay to avoid having to make the overage payment to Gaia Ventures. The judge in this case stated that it was beyond dispute that, by 2011, Abbeygate was considering how it might reduce or avoid its overage obligations.
Planning permission for redevelopment was obtained in 2010, altered in 2011, amended again in November 2012, and was almost certainly in a satisfactory form by February 2013 and the planning condition was likely satisfied by May 2013. The satisfaction of the site assembly condition however became protracted.
Gaia Ventures argued that Abbeygate was in breach of the overage agreement in that it had failed to use reasonable endeavours to satisfy the site assembly condition as soon as reasonably practicable.
The judge found in favour of Gaia Ventures as his examination of the evidence compelled him to determine that Abbeygate knew exactly what it was doing, and had been deliberately slowing matters down to suit its own purposes as the satisfaction of the site assembly condition could have been reasonably achieved before the longstop date. Abbeygate was therefore ordered to make the overage payment to Gaia Ventures.
While all cases depend largely on the individual circumstances of each case, there are two main points of consideration from the decision in this case:
- Landowners who wish to obtain a windfall at a later date should consider whether the agreed overage period is sufficient to ensure that there is a reasonable possibility that overage will be trigged during the overage period. In this case, the overage period was 10 years and given the complexity of the site assembly condition, it was not beyond the realms of probability that 10 years might not be sufficient in this case. They should also consider whether provisions for automatically extending the longstop date should be incorporated in the agreement. Obviously, the length of the overage period will depend on the strength of the bargaining positions of each party.
- Developers who agree to use “reasonable endeavours” in relation to the performance of a contractual obligation need to consider whether the manner in which they attempt to meet the obligation is reasonable in the circumstance. The actual meaning of the words “reasonable endeavours” still appears to be a mystery and a dark art. However, there is no doubt that the meaning of this phrase is very much a factual exercise in each case. The judge in this case said that “reasonable endeavours” was “a descriptive phrase without any immutable content. Its application requires a judge to make a value judgment in the light of all the facts of the particular case.” He went on to say that “something which merely affects the margin of a developer’s profit would not in the ordinary course be taken into account in considering whether it is reasonably practicable for a developer to commence or continue…at any time.”
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