They think its all over(age). It is now!

Disposals of land for development purposes are rarely, if ever, straight forward.

Landowners, when selling land, generally want to protect the future position particularly when they think that the purchaser may at some future date wish to develop or sell for development the effect of which produces an enhanced value in the land in which they would want to share.

One way in which this might be achieved is by way of an ‘overage’ provision.

‘Overage’ is effectively a deferred payment which falls due if some specified condition is met. The fundamental problem is that any obligation to pay ‘overage’ is a positive obligation and, as such, does not 'run with the land' and is not automatically enforceable against successive owners. A means of enforcement therefore has to be found to cover the circumstances where the original buyer has sold on and the trigger condition arises after acquisition by the successor in title to the buyer. If the position cannot be protected the ‘overage’ provision may not be worth the paper it is written on.

Just such an issue arose in the recent case of Cosmichome Ltd v Southampton City Council [2013] EWHC 1378 (Ch) where the High Court (Sir William Blackburne sitting as a High Court judge) considered the suitability of using a restrictive covenant to secure an overage payment.

The facts of the case are unremarkable. The BBC acquired land from the City Council and constructed a radio and television studio and administration centre on the site. The transfer contained a restrictive covenant confining the use of the land to broadcasting by the BBC which could be lifted on payment of an overage sum. In addition there was a right of pre-emption which would allow the City Council to re-acquire the property but if it chose not to do so then the BBC could dispose of the land elsewhere but subject to the overage sum. What in reality happened was that the BBC told the City Council that it intended to sell the property but remain in occupation under the terms of 25-year lease back. The City Council didn’t exercise the pre-emption right and Cosmichome, having bought the land, applied to the Court for a declaration in respect of the enforceability of the restrictive covenant.

The issues were whether:

• the restrictive covenant was unenforceable because its true purpose was to obtain payment in the event of a change of use;
• the City Council had lost its right of pre-emption by reason of its failure to respond and / or by reason of s.9 (2) Perpetuities and Accumulations Act 1964; and
• Cosmichome was bound by the City Council’s right of pre-emption in any event.

The court was clear that in order to be enforceable against successors in title to the original buyer a restrictive covenant must, at the time it was imposed, have been intended to and to have been capable of benefitting land of the seller. In this case the covenant was in effect a monetary obligation rather than a restrictive covenant and was not intended to protect or preserve the amenity or value of the City Council's adjacent land. The evidence suggested the real reason was to keep the BBC at the site and provide a lever to extract a payment if it tried to go elsewhere. Accordingly, the covenant did not bind Cosmichome as successor in title.

Section 9 (2) of the Perpetuities and Accumulations Act 1964 provides that

“In the case of a disposition consisting of the conferring of an option to acquire for valuable consideration any interest in land, the perpetuity period under the rule against perpetuities shall be twenty one years, and section 1 of this Act shall not apply. Provided that this subsection shall not apply to a right of pre-emption conferred on a public or local authority in respect of land used or to be used for religious purposes where the right becomes exercisable only if the land ceases to be used for such purposes.”

 

In respect of this issue the Court held that s.9 (2) had no application to a right of pre-emption so long as it had not matured into an option. An option is generally understood to be any “disposition” which from its inception gave rise to an interest in land as opposed to a right of pre-emption which was contractual until it was converted into an option and accordingly an equitable interest in the relevant land. The Court also held that the subsection referred to the disposition which conferred the option to acquire the interest in the land and it was reasonably clear therefore that the date for measuring the 21-year perpetuity period was the date when the option arose rather than the date when the right of pre-emption was conferred.

Accordingly, the City Council had not lost the right to enforce the right of pre-emption although it was not enforceable against Cosmichome for three reasons. First, it had not been a party to the original transaction; secondly, the issue had been raised very late in the day by the City Council; and thirdly, the Court was not prepared to countenance the imposition of any constructive trust on Cosmichome. The Court did however make clear that it was expressing no view on the ultimate merit of the City Council's contention in this respect or on whether it may properly be raised in some future action or whether, failing any remedy against Cosmichome, the City Council has any enforceable right against the BBC. 

So what does all of this mean?

Well it would appear that the Courts can be very reluctant to enforce restrictive covenants if the true objective of the restriction is not to preserve the amenity of land but rather to obtain payment or release of the covenant.

It will be interesting to see if the decision is appealed but meanwhile, in practical terms, the drafter of any ‘overage’ provision should pay careful consideration to the method adopted to secure any obligation to pay ‘overage’ to ensure that it is the correct approach in all of the prevailing circumstances and will be enforceable.