Overage and contractual interpretation: Another recent development dispute

26th September 2018

Yet another overage dispute has hit the legal headlines. Will Cousins and Martin McKeague explain and offer practical advice.

Common cause of development dispute

In recent years contractual interpretation (in particular the question as to whether a strict, literal approach to interpreting contractual language, or a more purposive/commercial common sense approach is to be preferred) has prompted several high profile disputes. In recent months there has been a flurry of development disputes, with a number involving the interpretation and operation of overage agreements [1].

In a developer/housebuilder market that is presently strong, many clients have the funds and appetite to renegotiate or litigate options, conditional contracts, promotion agreements and the like.  The desire to ‘make hay’ while the going is good, progressing as many developments as possible, also involves actively pursuing claims where commercially justifiable.  The longevity of many development agreements and JV arrangements can give rise to disputes, particularly if circumstances and market conditions change.  In the case of, London & Ilford Ltd v Sovereign Property Holdings Ltd [2], the Court of Appeal has again considered the approach to contractual interpretation.

Approach to contractual interpretation

The approach to contractual interpretation can now be summarised as follows:

• The courts will strive to uphold the clear wording of the clause wherever possible, applying the objective test of what the reasonable businessperson would understand the clause to mean, even if that results in a ‘bad’ bargain for any party [3].
• The court’s task is to ascertain the meaning of the language which the parties have chosen to express in their agreement when read in the context of the factual background known or reasonably available to the parties at the time of the agreement [4].
• However, where a contract term might be interpreted in different ways, the court is entitled to prefer the interpretation which is consistent with business common sense [5].
• Alternatively, where it is commercially and practically necessary, a court may imply terms into the contract to ensure business efficacy [6].

In short, a literal approach to contractual interpretation is to be preferred over a more purposive approach wherever possible. However, there may sometimes be provisions in even a detailed, professionally drawn contract which lack clarity. A court interpreting such provisions may take into account the factual matrix to ascertain the objective meaning.

London & Ilford v Sovereign Property Holdings

In this case the overage agreement provided that the developer would pay £750,000 to the landowner upon receipt of prior approval from the local planning authority for the development of 60 residential units.  “Development” was defined as as “…change of use… to a use falling within Class C3 (dwellinghouses)” and “residential units” were defined as “…dwellings to be comprised in a development…for residential use for sale or lettings”.

Planning approval was obtained, but the 60 units could not be lawfully built because it transpired that would contravene buildings regulations.

The developer argued, in reliance on the wording “dwellings… for residential use for sale or lettings”, that the purpose of the overage agreement was to provide a commercially viable benefit in exchange for the £750,000 payment, and that, in light of the building regulations issue, that benefit had not been provided and the payment was not due.  The Court of Appeal disagreed.

Finding for the landowner, the Court of Appeal confirmed that the regime for planning consent was entirely separate from the building regulations regime.  There was no mention in the overage agreement of compliance with building regulations or any other such requirement and it had been entered into between two sophisticated developers who were professionally advised.  The developer’s attempt to rely on a commercially-focused, purposive approach to interpretation of the overage provisions was “impossibly weak”.  The developer was therefore left having to pay out £750,000 and unable to develop the scheme as planned.

Practical advice

When entering into overage arrangements, parties and their lawyers should consider very carefully what exactly will trigger overage payments and they should spell that out very precisely.  Ideally, provisions should include clear and specific timescales within which detailed conditions are to be met; obligations are to arise; and payments are to be made.  Consideration should be given as to whether there should be included formulas for ascertaining any values and longstop dates and/or mechanisms for enforcing obligations and for resolving disputes.  This case also specifically highlights that developers may prefer to ensure that payments do not fall due until, say, implementation of a planning permission or disposal of the completed units; and that developers’ conveyancers should, depending on the extent of their instructions/retainer, be careful to ensure that they draft to cover every eventuality if they are to avoid potential professional negligence liability.

Please contact Will or Martin for any further advice or information about overage agreements and development disputes.

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[1] Please see our earlier article for more information about overage agreements and recent key cases.
[2] [2018] EWCA Civ 1618
[3] Arnold v Britton [2015] UKSC 36
[4] Wood v Capita Insurance Services Ltd [2017] UKSC 24
[5] Rainy Sky SA v Kookmin Bank [2011] UKSC 50
[6] M&S v BNP Paribas [2015] UKSC 72