1 August 2019 | Comment | Article by Kathryn Cooling

The importance of correctly drafting overage clauses

The recent decision of the High Court of Justice in Loxleigh Investments Ltd v Dartford BC provides a warning when it comes to drafting overage clauses and the issues poor drafting can cause when a dispute occurs.

Where there is a reasonable probability that land being sold may be redeveloped or that valuable planning permission may be granted in the future, seller’s will often try to negotiate an overage obligation with the buyer. An overage obligation requires the buyer to make a further payment to the seller, representing a share of the increased value of the property after the occurrence of an agreed trigger event.

If you have agreed an overage clause, getting the drafting right is particularly important. This can be harder than it seems as the parties should consider all reasonably foreseeable circumstances in order to ensure that the overage provisions remain effective for the whole of the overage period. Issues can arise later on when it is deemed an overage payment is triggered, if the drafting is not clear and requires construction. Overage payments can be considerable sums, so getting it wrong can be costly.

Sometimes a word and phrases in a lease or contract that you may be confident mean one thing can be considered by a Judge to mean something else or even precisely the opposite. In the case of Loxleigh Investments Ltd v Dartford BC such an issue arose over the use of the wording “detailed Planning Permission”. Below is a brief summary of the facts in the case.

 

The facts

In March 2013, Dartford BC sold land to Loxleigh Investments Ltd, with outline planning permission for the erection of five detached houses. Clause 4 of the transfer stated that the buyer would be liable to pay the seller an additional payment if "a Planning Permission is granted at any time during the Overage Period". The Overage Period was defined as 5 years starting on the date of the transfer, i.e. 12 March 2013 to 11 March 2018. Importantly to the case, “Planning Permission” was defined in the Schedule to the Transfer as "any detailed planning permission which grants planning permission for the construction of Units".

On 10 October 2013, Loxleigh Investments Ltd applied for, and was granted, approval of details in respect of the reserved matters, and in September 2015 it was granted permission to vary one of the conditions of the planning permission. Overall, permission was granted for four houses with internal areas greater than 3,000 sq ft.

Dartford BC claimed that the 2013 permission and the 2015 permission were each "detailed planning permission" within the meaning of clause 4, triggering liability to pay the additional payment. Dartford BC sought the sum of £235,977.52 as overage payments.

Loxleigh Investments Ltd disagreed and argued that the permissions were only the approval of the reserved matters / conditions and not planning permission. As such, they denied that the additional payment had become due.

 

The decision

Dartford BC sought summary judgment for the claimed sum and was successful. The Judge agreed with the submissions made by Dartford BC that "detailed planning permission" could refer to approvals and permissions granted pursuant to an outline planning permission. The Judge was also in agreement that the word "any" in the definition of Planning Permission could include either the grant of full planning permission for another development, and an approval or consent pursuant to the Outline Permission.

 

Our thoughts

The question is how and why the Judge in this claim interpreted the term in the way he did.

The starting point in interpreting any lease is always the words that the parties have used. The basic approach is to give the words used their natural and ordinary meaning in the context of the agreement as a whole. A Court will look to see what meaning a reasonable person would give to the words, having all the background knowledge which would reasonably have been available to the parties.

If you are in doubt about any words or phrases in a lease or a contract, you should think carefully about how it is commonly used. Attention should be given even to the smallest words, such as in this case, “any” can change the meaning of a term. Defining terms with precision can be challenging, but is extremely important.

Hugh James has a dedicated team of experts with experience in dealing with property related disputes. If you require assistance or advice, please contact a member of the property dispute resolution team using the contact form.

 

Disclaimer: The information on the Hugh James website is for general information only and reflects the position at the date of publication. It does not constitute legal advice and should not be treated as such. If you would like to ensure the commentary reflects current legislation, case law or best practice, please contact the blog author.

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