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London and Ilford Ltd v Sovereign Property Holdings Ltd 2018 EWCA Civ 1618

3 October 2018

Facts

A developer (L&I) bought a building from the seller (SPH) consisting of retail outlets and a restaurant on the ground floor, with offices above. L&I intended to convert the offices into flats (a Permitted Development Order from 2015 grants deemed planning permission for a change of use from offices to residential, subject to prior approval on various matters from the local planning authority.

L&I agreed to pay to SPH an overage payment of £750,000 if prior approval was received from the local planning authority for a minimum of 60 Residential Units at the property. "Residential Units" were defined as: "residential dwellings to be comprised in a development at the Property for residential use for sale or lettings…".

Once prior approval from the local planning authority had been obtained, L&I denied liability to make the overage payment because it could not actually build 60 Residential Units (as they would infringe building regulations relating to fire escape provisions). L&I argued that if a dwelling could not actually be built, it did not fall within the definition of “Residential Unit”, since it was not available for sale or letting.

Issue

Was L&I liable to make the overage payment to SPH even though it could not implement the development which triggered the payment?

Decision

The trial judge had granted summary judgement in SPH’s favour and this decision was upheld by the Court of Appeal.

The regime for planning and development consent and the regime surrounding building regulations are separate in their purpose, legislation and enforcement. The trigger event was clear and expressly concerned with change of use, a planning and development issue (there was no mention of compliance with building regulations or any other requirement that might need to be satisfied before the Residential Units could be built). If the parties had intended that the trigger event should require any compliance with building regulations, they should have made express provision to that effect.

Points to note/consider

  1. The outcome in this case is not a surprise, especially as both parties were experienced developers having the benefit of experienced professional advice (L&I was part of a group that specialised in office to residential conversion under permitted development rights and, at the time of the agreement, owned and managed 1,000 residential units, with a further 500 under construction). It was therefore up to L&I to satisfy itself on the viability of the scheme for 60 Residential Units before agreeing to it and to take the commercial risk of the scheme not being viable.
  2. The case is though another reminder of the care that is needed when drafting and negotiating overage provisions and the need to try to consider and account for all possible eventualities. It also shows the danger for a developer in agreeing to the grant of planning permission (or its equivalent here) as the trigger for an overage payment (as opposed to the implementation of that permission or a disposal of completed units, when value starts to be released).

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David Harris

David Harris

Professional Development Lawyer

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