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Land Sale Overage Agreements - Guideline Court of Appeal Ruling

When land is sold, it is common to enter into overage agreements so that vendors can share in the profits of any future development. In one case, the Court of Appeal ruled that a developer breached such an agreement when it sold five housing units to a social housing provider at cost price.

When the developer acquired the relevant land for housing development for £12.34 million, it agreed that it would pay overage to the vendor. Sums due to the vendor would be calculated as a percentage of the price achieved per square foot insofar as those sums exceeded a benchmark price.

After the sale, the developer obtained a modification of the planning permission from the local authority. In return, the developer signed an agreement under Section 106 of the Town and Country Planning Act 1990 whereby it undertook to sell five units to a social housing provider at cost price. It did that unilaterally, without the vendor’s consent, and the vendor launched proceedings.

The vendor’s claim was dismissed by a judge on the basis that the sale of the five units was a permitted disposal within the meaning of the overage agreement, in that it was a transaction that had been entered into for social or community purposes. The judge also found that the vendor had in any event suffered no loss because, in the midst of a falling property market, the price per square foot that would have triggered a payment under the overage agreement had not been achieved.

In allowing the vendor’s appeal against the judge’s decision, the Court noted that the sale of the five units to the social housing provider had not been on the open market or at arm’s length. On a true interpretation of the overage agreement, the transaction could not be viewed as a permitted disposal.

Also upholding the vendor’s right to damages, the Court noted that, had it known in advance of the developer’s plan to sell the five units, the vendor could have obtained an injunction to restrain the breach of contract. The developer’s unilateral action in completing the sale had deprived the vendor of the opportunity to negotiate an amendment to the agreement. The amount of compensation due to the vendor remained to be assessed.