TRIGGERS AND PITFALLS: AN INTRODUCTION TO OVERAGE AGREEMENTS

DAVID SCHMITZ

1. The purpose of overage is to enable the seller of land to participate in profits

which the purchaser or in some cases a successor will receive if specified events

occur – often, though not always, including the grant of planning permission –

and the value of the land thereby increases. Its appeal for the seller lies in the

fact that he may ultimately receive more for his land than he would if he sold it

at its current value, even if that value reflected the possibility that the events

might later come to pass; while its appeal to the buyer lies in the fact that the

presence of an overage clause will persuade the seller to demand less up front

than would otherwise be the case.

2. There are, however, a number of problems which can arise, and often they are

not properly considered. As observed in the leading book on the subject1,

“In practice, overage provisions are often included as a ‘bolt on’, particularly where the prospect of planning consent is remote. The main purpose which the parties have in mind is an immediate sale for a price representing current use value, but sometimes during the discussions, a provision is added to cover the possibility of future development. At the time of the original sale, this may be a distant prospect, and, therefore, the parties may not think it worth paying much attention to or worth going into overage issues in detail.”

1 Jessel, Development Overage and Clawback (2001) page 197

It is therefore not surprising that significant caselaw on mistake and

rectification concerns overage provisions. See, for example, Chartbrook Ltd. v

Persimmon Homes Ltd. [2009] AC 1011.

3. Needless to say, if the hoped-for event should come to pass, but the

expectations of either party are disappointed, any failure on the part of the

solicitor to secure his client’s position could lead to liability in negligence. The

principal sources of difficulty are as follows:

(1) The clause may fail to trigger a right to receive overage in circumstances

where the seller might reasonably have expected it to do so.

(2) The clause may encumber the buyer with an obligation to pay overage

in circumstances where he might reasonably not have expected to be so

encumbered.

(3) The wording may fail correctly to define the amount which the seller is

supposed to receive.

(4) Above all, there may be a failure to preserve the seller’s rights where

the property is transferred to a third party.

It is not possible to enumerate all of the ways in which an agreement may fail,

in any of the ways outlined above, to protect the parties, but it is useful to

elaborate each of the of the above categories and, by way of some cautionary

tales, to give examples of some useful precautions to take.

The general approach

4. The nature of the risks will depend upon the nature of the trigger which the

parties choose – be it, to take the most common examples, the grant of

planning permission, the building of the development or the sale of the

property. The form of trigger which is adopted is, of course, a matter for

negotiation between the parties in the light of their commercial interests, but it

is possible to indicate the kinds of problem to which each can give rise.

5. Where the trigger is the grant of planning permission, a problem generally will

only arise, firstly if there is a question as to whether the permission which is

obtained matches the specification in the agreement, or secondly if payment is

to be deferred and the payer defaults. Where the trigger involves the

completion of a development or its sale, the position is less straightforward.

The seller may therefore prefer to have the overage triggered by the grant of

planning permission and for it to be paid immediately thereafter.

6. That said, the buyer may not be in a position to agree to payment of overage

on the grant of planning permission, because the grant of permission does not,

of itself, produce money. It is only if the buyer is confident of being able to raise

sufficient finance upon obtaining permission, both to pay the overage and to

pay the development costs, that this can be a practical solution. For this reason,

or simply because the buyer may wish to accept certain risks in exchange for

being able to obtain a greater reward after the completion of the development,

the parties may therefore choose to define the trigger in terms of the

completion of the development or of its sale. If this is the case, then the

following problems must be addressed:

(1) It may be difficult to determine when the works are done. There may be

no certificate of practical completion, which settles the question.

(2) The buyer may become insolvent and a mortgagee may exercise its

powers of sale to an onward purchaser who may not be bound by the

obligation (see below with regard to the position as against successors in

title).

(3) The buyer, moreover, may simply decide not to build within the period

during which the trigger is expressed to operate.

7. For these reasons, it is wise to consider incorporating into the agreement an

obligation to build in accordance with the planning permission, and to

complete the building on or before the date when overage is to become

payable. Provision can be made for a valuation to be made as at that time,

either of the building as built or of the notional building which ought to have

been built. See Stephens v Cannon [2005] EWCA Civ 222, where valuations were

done on such a notional building in the assessment of damages for breach of

obligations to build in accordance with the planning permission and to pay

overage on the value of what was built. If a term such as this cannot be

achieved, it is especially important to draft the agreement so as to avoid

ambiguity as to when the obligation to pay overage is triggered. In this regard,

consideration should be given to some of the drafting matters dealt with

below, with a view to reducing the parties’ risks.

8. It is also necessary, always to consider the means by which the obligation to

pay overage can be secured for the benefit of the seller, both against the

buyer’s mortgagees and against the buyer’s onward purchasers. Ideally, the

obligation to secure the payment will be secured by a charge, which will protect

the seller’s rights not only as against the buyer’s creditors but also as against

the buyer’s onward purchasers. If the charge is expressed to secure contingent

liabilities, it will then protect the seller’s rights, even if they are dependent

upon a contingency which has not yet occurred – Re Rudd & Son Ltd. [1986] 2

BCC 98, 955. However, a first charge will seldom be possible to achieve,

because the buyer’s mortgagee will almost certainly object to any charge which

has priority to its own charge. In such a case it is a matter for negotiation as to

the extent, if at all, to which the buyer and his mortgagee are willing to

subordinate their respective interests to the seller in exchange for the

advantage of paying a lower purchase price which is only subject to increase

upon the happening of certain (possibly remote) contingencies. If it is not

possible to negotiate such a ranking of charges, or indeed to negotiate any

charge at all, it will be necessary at the least for the buyer to be required to

furnish promptly to the seller, any information which is relevant to the

triggering of the obligation, so that the seller will know immediately, once the

buyer’s obligations have become enforceable. The solicitor will also need to try

to protect the seller’s position as against onward purchasers, or failing that, to

advise the seller that his position is exposed and that he may therefore prefer

to give up the idea of overage altogether and to hold out instead for a higher

price, payable once and for all, which reflects the current “hope value” of the

contingency occurring, but which does not otherwise seek to share the benefits

of the contingency. These points are dealt with further below.

Failure of the trigger

9. The description of the kind of development which, if built, will trigger the

obligation to pay overage, may be expressed too restrictively and may

therefore be treated as excluding developments which might otherwise be

expected to fall within the description.

In Walker v Kenley [2008] EWHC 370 (Ch) the agreement was for overage to be payable if the buyer obtained planning permission to develop the property as residential flats and if he carried out that development within five years. The buyer obtained permission to build properties which were restricted to use as “holiday apartments.” It was held that holiday apartments did not fall within the description of “residential flats” as per the agreement, and that overage therefore was not payable.

As with other cases on points of construction, this case does not support any

rule of law to the effect that to describe a property “residential” will always

import the idea of full-time unrestricted residential occupancy – ie that the

property must be capable of being a full-time home in order for it to be

described thus. In this particular case, the buyer was aided by the fact that the

parties at the time of the agreement were well aware of the distinction

between holiday and permanent accommodation because there was an issue

with the local planning authority on that very point. In other cases, by contrast,

there may be circumstances which aid the seller and lead to the opposite

conclusion. Walker v Kenley, however, does show how a casually placed

adjective (“residential” in this instance) can land the parties into protracted

litigation.

10. Drafting errors which lead to the overage trigger being drawn too narrowly can

occur because very often the obligation to pay overage is not the only

contingency for which a contract of sale may provide. For example, the grant of

planning permission to effect a certain type of development, may be a

condition for the contact becoming binding in the first place, while the actual

building of the development may be the event which triggers the obligation to

pay overage. In such a case, a careless draftsman may unnecessarily equate the

description of the required planning permission with the description of the

building works which trigger the overage obligation. The risk to the seller is that

the buyer, having obtained permission which makes the contract uncondition,

may change his mind and then get permission to build something else which

does not trigger the overage obligation.

11. It is unlikely that a buyer could get out of the obligation to pay overage by

unilaterally abandoning the planning permission, because the Court would be

unlikely to interpret an obligation as one that can be so easily evaded. In such a

case, the Court would probably apply the contractual provisions on the footing

that the development had been built according to the initial planning

permission. Nonetheless, unnecessary litigation can ensue if the building works

that are intended to trigger the overage obligation are described with

unnecessary or inappropriate particularity, and the draftsman should therefore

be alert to the possibility of doing this inadvertently.

12. Expectations may be disappointed if unforeseen events make it impossible for

the contractual terms to be carried out to the extent necessary to trigger the

overage obligation. Paradoxically, the more detail in which the purchaser’s

obligations are described, the more readily the purchaser may be enabled to

plead supervening impossibility.

In Hildron Finance Ltd. v Sunley Holdings Ltd. [2010] EWHC 1688, an agreement was made in 1986 for the sale of a block of flats, in which all but one of the flats was let out under long leases and the one remaining flat was retained as a porter’s flat. The agreement provided that if the flat should not be required for use as a porter’s flat within the 21 years immediately following, the buyer should sell it and share the proceeds of sale with the seller.

In 1993, Parliament passed the Leasehold Reform, Housing and Urban Development Act which gave the tenants of a block of flats the right to acquire their landlord’s interest through the exercise collective enfranchisement. In November, 2004, the tenants served a notice under the Act, as a result of which it thereafter became unlawful, and indeed impossible, for the buyer to sell the property or to dispose of it otherwise than in accordance with the Act. In proceedings between the buyer and the tenants, it was held that £200,000 was the portion of the of the value of the block which was to be attributed to the value of the flat, while the expert witnesses of the buyer and the tenants agreed it to be worth £300,000 on the open market. The flat in the meantime ceased to be used as a porter’s flat. The block was subsequently acquired by the tenants on terms that included the payment of £200,000 for the flat.

Although the seller contended that an acquisition by the tenants under statutory powers should be treated as equivalent to the sale of the flat, it was held that the buyer was not bound to share the proceeds. The agreement had spelled out exactly what had to be done following the cesser of use as porter’s accommodation, namely the granting of a long lease, the marketing of the lease, and the sale of the lease at a price

approved by the seller. These events having become impossible, the obligation lapsed; the Court held that the compulsory disposal of the flat via the statutory machinery at a price below market value was not equivalent to a sale over which the parties had control.

It is therefore wise for the seller to seek to make the agreement provide that

overage shall be payable, whether the land is sold or acquired compulsorily by

the exercise of a public or private right, entitlement or power. The general

lesson for sellers’ solicitors is that the description of the trigger for the overage

obligation should be drafted in terms that are as broad as possible.

13. It sometimes happens that land which is purchased, subject to an overage

agreement, is not itself developed, but is instead kept as open space in order to

facilitate an application for permission to develop neighbouring land, which the

developer happens to own or which he subsequently acquires. Alternatively,

the overage land may be used to provide access or parking for neighbouring

land, in which case it will either not be sold off or be sold at a relatively low

price in comparison to the land which is built upon. This can happen especially

where parcels of land are being assembled in order to provide a large site for

later development. If the seller envisages the possibility of this occurring, he

should ensure that the agreement provides for overage to be payable as a

share of the uplift of the whole of any land which obtains planning permission

and which includes the land that is sold, as well as the whole of any adjacent

land which obtains permission at the same time (because developments are

sometimes subject to several applications which are considered together).

14. Where the overage obligation is expressed to comprise a share of the buyer’s

profits, particular caution is required, just as it would be in the case of a joint

venture. First of all, due diligence is necessary. Secondly, if the seller does not

have a veto over what is spent, regard must be had to the fact that the buyer

may be doing the building works through persons who are connected with him

and that he may be paying those persons accordingly. In order for the profits

not to be seen to be depressed artificially, there must at least be provision for

disclosure by the buyer of all bills, payments and architects’ and surveyors

certificates. The solicitor must take pains to tell the client, especially if the

client is not experienced in these matters, that when it comes to payment, the

client will stand at the end of the queue and will only be paid (if at all) once the

mortgagees and the builders have been paid in full.

The trigger going off unexpectedly

14. It should be remembered that anyone can apply for planning permission to

develop land, whether he owns it or not. Therefore, if the grant of planning

permission is to trigger an obligation to pay overage, care should be taken to

avoid imposing the obligation to pay overage where planning permission is

obtained which the buyer neither seeks nor wants.

In Micro Design Group Ltd. v BDW Trading Ltd. [2008] EWCA Civ 448 the seller sold land under a contract which provided that overage should be payable if “improved planning permission” were granted and which did not specify at whose behest the planning permission should be acquired in order for the overage obligation to be triggered. Following the sale, the seller obtained a further planning permission and then claimed an overage payment from the buyer. The first instance judge allowed the

claim. Although the Court of Appeal subsequently dismissed it and observed (at paragraph 22) that , “no person would enter into an agreement to buy development land with planning permission and then give the seller the right after completion to obtain further payments by seeking and obtaining planning permission itself which the buyer might not want.”

It is nonetheless strongly arguable that the buyer only succeeded because the

contract contained other features which enabled the Court to infer, as a matter

of the construction of that particular contract, that only permission sought by

the buyer would “count.” Had those features been absent, the Court might

have had to interpret the contact as entitling the seller to overage in these

surprising circumstances. Micro Design was a close run thing which went as far

as the Court of Appeal. The moral for the draftsman, therefore, is not to leave

this issue to chance and to provide that the obligation will be triggeed only by a

grant of planning permission on the application of the byer or of the owner for

the time being of the land.

15. Sometimes it may be in the buyer’s interest, rather than the seller’s, to contend

that the trigger has gone off.

In Hallam Land Management Ltd. v UK Coal Mining Ltd. [2002] 2EGLR 80 the claimant was granted an option which was exercisable upon submitting an application for the development of a 42.5 acre site at a price to be governed by the number of “developable acres” as determined by the terms of the planning permission. The claimant submitted an application to develop just 2.5 acres and this was granted. The claimant then purported to exercise the option to buy the whole 42.5 acres on the basis that only 2.5 acres was developable. It was held that by the Court of Appeal affirming the judge at first instance that there had been no application for development within the meaning of the agreement, and that therefore there had been no exercise of the option.

Although the seller’s interest was in fact protected, a Court of Appeal decision

was required. It is therefore important that close attention be given to the

definition of the planning permission which is to trigger the overage provision

and that provision be made for repeated payments of overage whenever any

part of the land may receive planning permission, lest the buyer be able to get

out of the obligation too cheaply.

16. Where the overage agreement provides that overage will not be payable in

certain circumstances, the Court will not stretch the meaning of that provision,

especially if the buyer seeks to have it apply in circumstances where it was

within the buyer’s control whether the requisite circumstances arose or not.

In Ministry of Defence v County & Metropolitan Homes Conveyancing [2002] NPC 130, the buyer agreed to pay overage if it obtained planning permission for residential land forming part of a 70 hectare site, but it was also provided that overage would not be payable if 37 houses in a portion of the land were demolished. The buyer demolished 35 of them but converted two of them into a village shop to comply with a planning requirement that a village shop should be provided. The seller claimed overage and the buyer sought to defend on the basis that the conversion of the houses amounted to a demolition for the purposes of the agreement. The Court held that the terms of agreement should be given their full effect, that the conversion was not a demolition and that it had been the buyer’s choice that the two houses should remain undemolished.

How much is the seller to receive

16. Often, the amount of overage payable will be determined by a formula which

specifies a percentage. In such cases, the difficult question which can arise is, “a

percentage of what?” Normally these cases will turn solely upon the terms of

the particular agreements which have given rise to them, or upon the facts

which give rise to claims for relief on the basis of mistake or misrepresentation

or to claims for rectification. Four general points, however, are worth making.

17. Firstly, it is necessary to define with care the land which, when sold, will be

subject to the overage obligation. In Bride Hall Estates Ltd. v St. George North

London Ltd. [2004] EWCA Civ 141, a dispute arose as to whether the overage

should represent a percentage of the sale proceeds of a flat, or whether it

should also include a share of the proceeds of the car parking. The Seller

succeeded, but in the Court of Appeal.

18. Secondly, it is risky to provide without elaboration that the overage is to be

calculated as a percentage of the proceeds of sale. The sale may be made at an

undervalue because the onward purchaser Is connected to the buyer, or

because it is done as a loss-leader in aid of another transaction. It is therefore

wise to provide for the seller to be able to require a valuation. Further, it is

necessary to provide for the possibility that the buyer will grant a lease over the

land, rather than sell it, or that the buyer might occupy the land himself. One

way in which these cases could be met would be by providing that if the land is

not sold by a given date, overage will be based upon a valuation to be obtained

as of that date.

19. Thirdly, if one party is relatively inexperienced in these transactions, while the

other party has substantial experience, the Court will be slow to grant the

experienced party relief on the ground of mistake.

In George Wimpey UK Ltd v VI Construction Ltd. [2005] EWCA Civ 77, there was an overage agreement based upon the sale proceeds of flats. Negotiations proceeded on the basis that the value of certain enhancements to the individual flats would be taken into account in the formula and thereby reduce the overage payable. The seller omitted this provision and the draft agreement was approved without it. The Judge at first instance found that the seller had shut its eyes to an obvious mistake and ordered rectification. The Court of Appeal however overruled the Judge and held that in the absence of convincing evidence that it had shut its eyes to the obvious, an inexperienced party would be able to resist a claim by a far more experienced one for the rectification of a contract that had been negotiated at arms’ length. The fact that there had been a late change in the draft which operated to the substantial disadvantage of the experienced party was not sufficient to enable that party to succeed. The case is particularly significant because of the fact that a decision of the trial judge on a question of fact was overturned as wrong in principle.

20. Fourthly, as in any other contract, the Court will intervene where it is apparent

from the face of the document that the wording has gone wrong, in the sense

that if taken literally it would deprive the contract of commercial sense.

However, it is only in rare cases that the Court will find that the wording has

gone wrong in a professionally drawn document.

In Chartbrook Ltd. v Persimmon Homes Ltd. [2009] AC 1101, the House of Lords, overruling the first instance judge and the Court of Appeal, held that this was one of the rare cases where the literal wording of the agreement made no commercial sense and where it could be deduced from the document what the parties had in mind.

In that case, it was apparent from the terms used by the parties in setting out the formula for calculating overage that their intention was to pay the seller for the current value of the land, and thereafter to pay the seller a further sum for the value of the land if the flats in the development were sold for more than they were expected to reach. However, the formula which was employed, when viewed in accordance with conventional syntax, provided that the price payable as overage (or the “additional retail payment” as was stated in the agreement) should be far greater than any increased value of the land. What it contemplated was that the additional payment for a flat should equal 23.4 % of the price achieved from which would be deducted the land value of the flat, otherwise known as the “minimum guaranteed residential unit value” (or ‘MGRUV’ for short), which was defined as 23.4 % of its estimate value and which was set at £53,438 per flat. The seller, however, contended that the formula should be applied literally. What the formula did when literally applied was to require a second payment which comprised 23.4% of the difference between the sale price (less marketing costs) and MGRUV – a vastly higher sum bearing no relation to any increase in land value.

This can be demonstrated thus: the flats had originally been expected to

fetch about £200,000 and MGRUV represented a percentage which was slightly over 23.4% of that figure (it was exactly 23.4% of £228,000). Therefore it was apparent that the 23.4% of the actual sale price (less costs) minus MGRUV would represent the increase in the value of the land, but that an enormous windfall to the seller would be produced if he were instead to receive 23.4% of the difference between the sale price (less costs) and MGRUV. To put rival contentions in algebraic notation, the seller was claiming 23.4% x (price – costs – MGRUV), while the buyer was claiming to be liable for no more than 23.4% (price – costs) – MGRUV. To give an example as to how the formulae worked, the first (the seller’s) formula on a sale at £240,000 (net of costs) would have produced an overage figure of £43,655.50, while the second (the buyer’s) formula would have produced a figure of £2,722, which was far more in line with expectations, where the flat sold for only slightly more than the predicted price.

The House of Lords found for the buyer for three reasons. Firstly, the

literal interpretation of the provision was totally at variance with the commercial sense of the contract, secondly the commercial sense of the contract could be determined from the choice of words used in the formula itself (“minimum guaranteed residential unit value” and

“additional residential payment”) and thirdly the literal interpretation would make the structure and wording of other provisions in the agreement arbitrary and irrational – see Lord Hoffman at page 1113 G.

The House also reaffirmed, however, that evidence of pre-contractual

negotiations is inadmissible in cases of contractual interpretation, unless it is intended to show either that there had been a definite antecedent agreement which the later written agreement did not correctly embody or else that the parties had negotiated on certain agreed assumptions (for example as to the meaning of a word) so as to raise an estoppels by convention. For such contentions to succeed, they would have to be clearly pleaded and proved.

Overage and successors in title

21. As mentioned above, the most effective means of securing a right to the

payment of overage is by means of a legal charge. However, as also noted, it is

not always possible to achieve this in negotiation. In the absence of such a

charge, there is only one other way in which the seller’s rights can be

effectively secured against a third party, that is by ensuring that the contract

provides that:

(1) successors in title of the buyer should be liable to pay overage to the

seller if the trigger event occurs during their ownership of the land;

(2) the buyer should agree to the entry of a Restriction on the Land Registry

title under Section 43 of the Land Registration Act 2002 to protect that

obligation by providing that no disposition of the land should be made

without the consent of the seller.

The agreement should also provide that the seller shall be entitled to refuse

consent to the registration of any onward purchaser as proprietor unless that

onward purchaser personally enters into the overage agreement and consents

to the entry of an equivalent Restriction.

Although the matter has not been settled definitely, it is highly likely that such

a device will be effective to protect the seller’s interests – see Akasuc Enterprise

Ltd. v Farmar & Shierreff (a Firm) [2003] EWHC 1275 (Ch), Peter Smith J,

paragraphs 85 – 7. Note that from the buyer’s point of view it is necessary to

define those classes of purchaser who are to be subject to this requirement,

lest leaseholders of relatively short terms, for example be caught.

22. Attempts to make the overage agreement binding on the buyer’s mortgagee,

may meet with resistance from mortgagees for the same reasons as apply in

the case of charges. In particular, the mortgagee will be concerned that any

onward purchaser who buys subject to overage will pay less up front than he

would otherwise do, and this could accordingly lead to a shortfall at the

expense of the mortgagee. The mortgagee might therefore insist that the

obligation should not be binding upon any purchaser who purchases from the

mortgagee under its powers of sale. This would be unattractive to the

seller/overage owner. A possible alternative might be to allow the Restriction

to operate in all cases (including sales by a mortgagee), but for the shortfall in

the mortgagee’s recovery (ideally up to an defined limit) to be secured by a

charge over any sums which may become due by way of overage from the

onward purchaser. Although this may ultimately fail to secure the whole

amount, it will still be better than leaving the seller with a wholly unsecured

entitlement. Another possibility, though far less attractive, may be for the

overage agreement to provide that any surplus after the repayment of the

mortgage should be paid into a joint account in the names of the buyer and

seller and used to the discharge of the overage when it is eventually

ascertained. Once again, though, all would depend upon negotiation. Whatever

inadequacies there may be in securities which are subordinated to the interests

of the mortgagee, it is still important to obtain whatever security one can,

because there is plenty of scope for a solvent buyer to attempt to defeat the

seller’s rights, as in the Akasuc case itself.

What does not protect the seller?

23. An obligation to make payments, whether or not expressed to bind successors

in title, will not be protected by the registration of a unilateral notice under

Section 34 of the 2002 Act, just as a caution was insufficient to protect such a

right under earlier legislation – see the Akasuc case (above). The reason is that

the right is not an interest in land.

24. In certain circumstances, a restrictive covenant could protect the seller’s rights,

but such protection cannot be relied upon. It must be remembered, firstly, that

a positive covenant will not bind successors in title of the person who has the

benefit of the covenant – Rhone Trust v Stephens [1994] 2 AC 310. Therefore, if

it is to be binding upon a successor it must be expressed negatively – for

example in terms of a covenant not to do a particular thing together with an

agreement to release the covenant upon payment of a given sum. Two

difficulties arise here, however. Firstly, the covenantee will not be able to

enforce the covenant if he does not retain any land which is capable of

benefiting from it, and secondly the covenant can be challenged on the basis

that it is not necessary to protect the land retained, as opposed to the seller’s

financial interests.

The Solicitor’s position

25. In the Akasuc case, Peter Smith J held that:

“[Security] is a matter of a solicitor discharging her retainer. The retainer is to use all reasonable endeavours to obtain security for the overage. It is not a matter of advice in that sense. The solicitor has to come up with a suitable method of securing the overage (assuming that [the buyer] would accept it).”

To this, I would add that the solicitor is also under a duty to inform the client of

the extent to which the overage entitlement is not secured, and to enumerate

the circumstances where the entitlement could be left unsatisfied.

Claims for damages

26. A claim by a client whose contract does not trigger the obligation or who has

not received adequate security for that obligation will aim initially to recover

the benefit which the contract would have provided, had adequate security

been in place. However, because the claim is one of professional negligence,

the question for the Court will be, ”what contractual terms would have been

obtained and what security would have been provided if the solicitor had not

acted negligently and what benefits would such terms have yielded to the

client?”

27. In addressing the first part of that question, the terms of the actual contract

will merely be evidence of what the hypothetical contract would have

contained if correctly drawn, and the evidence which the actual contract

provides may not be very strong on that issue. After all, a buyer who knows

that the overage obligation are ineffective and that he can sell without

ultimately having to pay overage and that he can moreover sell at a price which

is not depressed by the presence of an overage obligation affecting the onward

purchaser, may be willing to make the most extravagant promises, secure in

the knowledge that they will not have to be honoured. It will therefore be

necessary for the client to give evidence as to the sort of bargain which he had

been in a position to strike. The presence of rival bidders and the client’s own

state of financial health (relevant to the question of whether he could have

bided his time until a good offer came along) will be important considerations,

as would be, of course, the state of the market. If the receipt of the overage

money was frustrated by the insolvency of the buyer at the time of his onward

sale, it will also be necessary to consider whether there were cash buyers (who

did not have to please mortgagees) among the potential purchasers and

whether there were mortgagees in the market who would have been willing to

lend in circumstances where the right to overage was be binding upon onward

purchasers. Finally, it would be necessary and useful to know the value of the

land at the time of the agreement, and the amount by which that value

exceeded the actual sale price which – a price which by definition would have

been discounted because the then current hope value would have been left out

in favour of the overage provisions. This is especially important in the case of a

claim by any client who would have been likely to have taken a safe course

rather than a risky one, if he had been properly advised.

28. Limitation The failure by a solicitor to secure an entitlement to overage falls

within that class of case where a person has, through professional negligence,

been caused to part with property on terms which are less advantageous than

would have been the case if the negligence had not occurred. That being so,

the cause of action accrues, and the limitation period begins to run, when the

contract of sale becomes binding – see Law Society v Sephton [2006] 2 AC 543.

This, of course, does not prevent the limitation being extended in cases of

negligence under the Limitation Act 1980 Section 14B, or the postponement of

the limitation period in cases of fraud or concealment under Section 32.

© David Schmitz – February 2012