The task facing a conveyancer when asked by a client selling land to provide for overage payments is not without difficulties. It poses a higher degree of risk than many other conveyancing transactions. English law does not cater happily for the right to receive overage. It does not fit into a particular category of property interest in any traditional analysis. Positive covenants do not run with the land and therefore a certain degree of ingenuity has to be exercised by the conveyancer to ensure both that, when triggered, there is a person against whom the overage is enforceable and that the amount payable is the expected amount.

The extent of the risks involved for conveyancers in such a task has been illustrated yet again by a recent professional negligence case – Akusuc Enterprise Ltd v Farmar Shirref [2003]. Background

Problems over the drafting of overage arrangements are not new. In Titanic Investments v Macfarlanes [1997], Robert Walker J had to consider the implications of the manner in which the definition of the trigger for the overage payment had been drafted. Was it restricted to a single specified planning application and, if so, was this negligence?

Meanwhile, in Virgin Management v De Morgan [1996], the court had to scrutinise the form of words employed to specify how the amount of the overage payment was to be determined, to decide whether there had been negligence in the drafting.

An overriding objective with such arrangements is to ensure that the overage right is enforceable against successors in title of the purchaser and is not merely a personal obligation limited only to the purchaser. If the right is personal only to the purchaser, it can be easily circumvented by the purchaser selling on to a third party that will be able to develop the land without having to make any overage payment.

It is also important to ensure that the definition of the trigger for the overage payment is not limited to an event that will result in no payment, or one that is smaller than is expected.

These are areas that gave rise to problems in two of the cases mentioned, in particular in Akusuc Enterprise, where an overage arrangement was entered into but no mechanism was included in the sale agreement to allow for the enforcement of the overage against any successor to the purchaser. The purchaser sold on and the new owner developed the land without making any overage payment to the original vendor.

In both Akusuc Enterprise and Titanic Investments, the vendors succeeded against their solicitors. The solicitors were held to be negligent for not having attempted to meet the clients’ expectations as regards security against the purchaser’s successors and in defining the events that would trigger the payment. In each case damages were awarded for a lost opportunity to negotiate a better agreement.

The extent of a solicitor’s duty

In Akusuc Enterprise , Peter Smith J said, as regards the solicitor’s duty, that:

[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.

Although in that case the client’s instructions had specified this requirement, even if not expressly stated it is a matter on which a conveyancer should make enquiries of its client.

By their nature, overage arrangements may run for a substantial period and thus it will be extremely difficult, if not impossible, to anticipate all the events that may occur subsequent to the creation of the overage arrangement. Different conveyancers may take different views as to exactly what needs to be covered and in what manner.

However, what is absolutely clear is that the overage arrangement must, on behalf of the vendor, have some mechanism included to ensure that the overage obligation is enforceable against successive owners of the land and that the definition of the trigger event is not defined so as to seriously limit the ability of the vendor to receive an overage payment. The only good reason for not having such a mechanism is that the purchaser absolutely refuses to countenance any such provision. In such circumstances, careful advice needs to be given to the vendor, warning of the consequences of the absence of such a mechanism and, as a practical step, that advice needs to be recorded in writing.

Failure to adequately cover this point will expose the conveyancer to the risk of a negligence claim.

Mechanisms

Peter Smith J, in Akusuc Enterprise, considered the alternatives put forward in argument as possible mechanisms that should have been considered for adoption by the conveyancing solicitor. His views in this context are of interest. This is because not only are overage entitlements a species of right that does not fit happily into any traditional analysis and characterisation of property rights and interests, but they have also been the subject of little judicial consideration. To say any judicial consideration is in consequence very welcome is not to belittle the dicta of Peter Smith J.

Five alternatives were put to the learned judge in argument as mechanisms that should have been considered during the negotiations. They are:

(i) Positive covenant

It was alleged that a positive covenant to pay a sum in certain specified events should have been inserted in the sale agreement so as to run with the land. The conveyancer in cross-examination had ‘admitted’ that she should have added the words ‘and its successors’ in the purchaser’s covenant.

The judge, however, held that this did not really take the matter any further forward. Positive covenants do not by themselves run with the land, as confirmed by the House of Lords in Rhone Trust v Stephens [1994]. This is at the heart of the difficulty with overage agreements. The learned judge noted that no argument was put to him that such a covenant should have been linked to a right of entry or an estate rent charge. The reason for this may have been that the former is little-used and faces problems, whilst the latter probably cannot be achieved with pure overage arrangements. The judge therefore rightly rejected this first mechanism as ineffective.

(ii) Chain of covenants

The second mechanism was to have a positive obligation to make overage payments combine with an obligation to procure that any person acquiring an interest in the land enters into the same overage obligation. This then establishes a direct covenant between the vendor and the person acquiring such an interest.

The learned judge considered the use of restrictions entered on the land’s registered title to secure the performance of that obligation to procure a covenant to pay the overage. His dicta on this are of interest, as there does not seem to have been any previous judicial consideration.

Restrictions

Arestriction is an often-used mechanism with overage arrangements. An obligation is imposed in the agreement that a restriction be entered against the registered title of the land sold, preventing a dealing with the land without the prior written consent of the vendor. The protection, if effective, is simple. The purchaser and any successor cannot sell on or otherwise deal with the land unless the dealing is exempted from the need to obtain the vendor’s consent, or such consent is obtained. Unless a direct covenant to pay overage is entered into, no consent will be given. If such a direct covenant is given, then the vendor will normally be obliged expressly to give such consent.

The use of restrictions in this context is essential because neither the covenant to make the payment nor the covenant to procure direct covenants with the vendor can be protected by a caution.

One of the issues that the judge had to consider was the effectiveness of the use of restrictions. In the context of that case, if it had been argued that their use was not an effective mechanism, there would have been no point in the conveyancer considering this as an option. It could not have been negligent for failing to consider a mechanism that was not effective.

In the event, neither side argued the legal effectiveness of the use of restrictions, so the point did not have to be decided by the judge. Nevertheless although the judge expressly stated that he was not giving a conclusive view as to the effectiveness of restrictions, he did go on to say that he would be surprised if after full argument such a restriction would be struck down.

He considered that it was unlikely that a judge ‘would find a widespread modern commercial arrangement unlawful’. He held that a developer would have taken the view that the restriction would be a successful way of protecting the overage payment, and that any person acquiring the land for the purposes of developing it would expect to pay the overage to the vendor.

The judge did refer to the fact that there must be many thousands of titles against which restrictions have been entered. Their use is not limited to protecting overage payments. Among the examples he gave were restrictions used to secure the performance of planning agreements under s106 the Town and County Planning Act (TCPA) 1991 and the repayment of discounts in purchase price on sales of council houses.

The judge also referred to Christopher Jessel’s book on the subject, Development, Overage and Clawback, which recommends the use of this mechanism. This encouraged him in his judgement that restrictions would be regarded as effective by those concerned with the matter. The case does not go so far as to be authority for the proposition that such a restriction is legally effective to protect an overage entitlement. However, the judgment provides sufficient reassurance as to their effectiveness so as to ensure, not just that they will continue to be used, but that any conveyancer drafting such an arrangement must consider their use as one of the available options.

(iii) Second charge

There have never been any doubts regarding the effectiveness of this option. The difficulty is that the purchaser or the purchaser’s financiers may object. Evidence of such a practical obstacle to the use of a charge is found in Akusuc Enterprise. The judge found as a fact that the option of a charge would not have been available in that case because the purchaser would not have conceded it during the negotiations. This practical limitation means that the use of charges will not be a widely available protection. In contrast, the judge considered that such a stance would not have been taken by the purchaser with regard to a restriction on the title.

(iv) Pre-emption right

There was little said about the fourth option put forward in argument. The use of options or pre-emption rights has been suggested but little-used, certainly as the sole means of protection. They have been used as a means of recovering land in the event that planning permission has not been obtained within a specified period, but that is a different point. In any event, they do not appear to have been suggested, in the course of argument, as a satisfactory option that should have been considered.

(v) Vendor's lien

One further option was considered by the judge even though it had not been pleaded as a possibility. The judge took the view that the conveyancer should have considered amending the contract so that the overage, instead of representing additional payments to the purchase price, actually formed part of the purchase price. This would then have meant that the overage would be protected by the vendor’s lien as it would constitute outstanding purchase price. This option was described by the judge as being ’relatively straightforward on analysis and after argument’. He went on to say that the ‘advantage of the lien, however, circumvents the difficulties (if any) posed by the restriction method of protecting the same obligations’, suggesting that he considered this preferable to the use of restrictions. This is surprising. It appears from the judgment that there had been no argument as to the stance that would have been taken by the prospective purchaser with regard to the vendor’s lien. It has to be assumed that the point would have been picked up by those acting for the purchaser. Often out of caution the vendor’s lien is expressly excluded.

Why should the purchaser have agreed to such a lien when the judge has already found that the purchaser would refuse to accept a second charge? From the purchaser’s point of view is there any difference between the two? Each will raise the identical practical problem with financiers. In the circumstances of that case, if the second charge was not a viable option then similarly the vendor’s lien should not have been.

Practical pointers

• It is vitally important to select at least one mechanism by which to secure the payment by successors in title to the purchaser. Failure to consider the available options and include at least one will constitute negligence.
• Merely imposing an obligation to pay the overage on the purchasers and the purchaser’s successors is not sufficient.
• Registration of a caution to protect an obligation to pay overage will not be possible.
• The use of a restriction entered on the registered title to secure performance of an obligation to procure direct covenants from a person dealing with the land has been upheld by Peter Smith J, although the issue of the legal effectiveness of this mechanism was not argued before the judge.
• The use of the vendor’s lien as a protection by incorporating the overage in the purchase price was approved by the judge, but without argument as to how the purchaser would respond to such an option. There is really little difference between this option and a charge. The vendor’s lien may be more objectionable because it has priority over a charge by the purchaser.
• From the purchaser’s perspective it will always be preferable to expressly exclude the vendor’s lien.
• Strangely, the use of restrictive covenants and other options was not considered during the course of argument. This may just be because it only had to be established that there were some viable possibilities without going into all of them. The judge was not stating that these should not be considered or could not be effective in the appropriate circumstances.
• If the purchaser will not accept any mechanism to secure the overage payment then a very clear and full warning needs to be given to the vendor who still wishes to proceed with the sale notwithstanding the absence of such a mechanism. This warning should be recorded in writing, preferably in the form of a letter to the client.

Case references

Akusuc Enterprise Ltd v Farmar Shirref [2003] EWCH 1275

Rhone Trust v Stephens [1994] 2 AC 310

Titanic Investments v Macfarlanes [1996] NPC 8

Virgin Management v De Morgan and ano r (Unreported, 24 January 1996)

Christopher Cant is a practising barrister at 9 Stone Buildings  © Property Law Journal