Overage - making yourself clear
If I said 'residential units', would you know what I meant? The chances are that you would have a good idea; after all, those words hardly constitute legalese. But would you know precisely what I meant? Would, for example, that phrase cover care home units or flats for sheltered accommodation?
A recent case
Interpretation of the meaning of 'residential' was a key question in the case of Harris -v- Berkeley Strategic Land Ltd  EWHC. The dispute concerned whether overage (a mechanism whereby a seller can share in an increase in a property's or land's value post sale), calculated by reference to the number of residential units within a development, was payable. In particular, could care home residential units (with shared facilities such as a common reception and dining facilities) constitute 'residential' units? It was determined, for a number of reasons, that they did. Overage was payable on the number of units in excess of an aggregate figure multiplied by £55,000 per unit (subject to indexation). The decision meant that the total number of units amounted to 75 rather than 15.
This case demonstrates that when it comes to overage, in addition to plain English, we need precise English! Not only is this relevant to the drafting of the legal document, but it is equally important at the negotiation of the heads of terms stage.
Key principles to address
Let's remind ourselves of the key principles to address when negotiating overage terms and drafting the legal document:-
- What is the overage trigger? Common triggers include a forward sale, grant of planning permission and sales overage. These triggers need to be broken down and made precise. For example, should a forward sale capture a sale of shares in the company that owns the property? Would the grant of a lease constitute a 'sale'?
- How will the overage be calculated? Include worked examples. It is surprising how often a calculation formula looks sound until you start plugging the numbers in!
- When will the overage become payable? This will often depend on the type of overage. For example, planning overage could be payable on the grant of a qualifying planning permission. What if that planning permission is subject to judicial review though?
- How will the overage be secured? The most common method is to put a restriction on the title of the property affected. This does mean that there will be an element of future administration and the practicalities of this need to be thought through. If you are a developer selling individual plots, for example, think about how such restriction is going to affect your plot selling process.
Overage is complex. By its very nature, it is intended to apply to situations in the future based on conjecture as to how those events may unfold. It is unlikely that any drafting can cover all possible eventualities. However, clients, agents and lawyers all have a part to play in endeavouring to document their overage deal in clear and precise language.