Overage for the unwary

In yet another dispute about the payment of overage in a property transaction, the Court of Appeal recently ordered a property developer to pay overage to the seller, despite the fact that the land in question could not be developed as planned.

In this case, the developer had agreed to buy an office property. The developer intended to convert the offices into residential flats - and agreed to pay the seller more (an overage) if it did so.

As in many overage disputes, however, the devil was in the detail. One of the triggers for payment of overage was prior approval of the conversion from offices to residential flats by the local authority. Prior approval was received. But then the developer realised that, notwithstanding this approval, the conversion would contravene building regulations (relating to fire escapes) and so could not proceed. The Court of Appeal concluded that the overage provision had nevertheless been engaged and that the overage was payable.

This was a classic case where the drafting of the overage provision did not deal adequately with all potential outcomes. The overage became payable even though the developer did not obtain the financial uplift that it was apparently sharing with the seller by paying overage.