Suppose that a seller transfers property to a buyer for an initial payment plus an obligation to pay a further amount after planning permission is granted, and after taking into account certain expenses. The seller may require the buyer to charge the property back to the seller as security. Another method is to impose a covenant to prohibit development of the property unless and until the contingent extra amount is paid. These and other methods have their strengths and weaknesses.

If the property is charged to the seller, there is a question of priority between mortgagees; finance may be needed for the initial payment and for other purposes. If a restrictive covenant is used, this would normally only bind successors of the property where some other land is retained in order to have the benefit (unless the covenant is in a lease or coupled with a nominal rent charge and a right of re-entry). Alternative methods include retaining a ransom strip and restricting access to the property sold. What is appropriate for one deal may not suit the circumstances of another transaction.

Disclaimer of onerous property

If the overage is secured by a charge on property, is this affected by the buyer’s liquidator or trustee in bankruptcy disclaiming the agreement to pay the overage as an unprofitable contract for the purposes of ss178 or 315 of the Insolvency Act 1986?

This was examined by Nicholas Underhill QC sitting as a deputy judge of the High Court in Groveholt Ltd v Hughes & anr [2005]. In particular, he considered s178(4) of the 1986 Act, which provides:

(4) A disclaimer under this section –

(a) operates so as to determine, as from the date of the disclaimer, the rights, interests and liabilities of the company in or in respect of the property disclaimed; but

(b) does not, except so far as is necessary for the purposes of releasing the company from any liability, affect the rights or liabilities of any other person.

The facts in Groveholt

Hughes, the first defendant, agreed in 1996 to sell part of his former quarry to Sainsbury. The site had development potential but this would require considerable infrastructure works, including bridges over a railway and a river, for which land owned by third parties was needed.

The price was £7.3m but only £2.3m was paid on transfer. Initially, £5m was put on deposit to pay for site assembly and infrastructure, with any surplus to go to Hughes. This was varied when a loan was made to Hughes. He agreed to indemnify Sainsbury for^any excess if the cost of site assembly and infrastructure work proved to be more than £5m.

Hughes then agreed to sell the remaining property to developers Chelverton (the Chelverton Agreement). He was paid £1.5m on completion and was to receive further payments of up to £5m, conditional upon the granting of certain planning permissions. ChelveÂton charged the property in favour of Hughes in respect of the outstanding balance owing to the latter. By a deed of novation, Chelverton stepped into the shoes of Hughes as regards Sainsbury.

The Chelverton Agreement included a clause stating that the further sums would not be payable until the costs of site assembly and infrastructure works had been ascertained, so that there would be a deduction to the extent of certain shares of expenditure to be paid for by Hughes.

In 2001 Groveholt purchased the property from Chelverton, subject to the charge. Between 1999 and 2001 the relevant permissions were granted so that Hughes was to be paid £3m. However, Chelverton went into creditors’ voluntary liquidation in 2002. By notices filed on 11 December 2003, its liquidator disclaimed the Chelverton Agreement and the deed of novation.

The further sums had not been paid because not all of the site assembly costs had been ascertained.

Hughes sought to exercise a power to sell the charged property. Groveholt denied that any sum was secured by the charge and sought its cancellation.

The decision

The Court said that the effect of the disclaimer by Chelverton’s liquidator was to release Chelverton and Hughes from any liabilities under the Agreement that had not accrued as at the date of disclaimer, but to leave unaffected any obligations which had already accrued.

Normally, payment of a price by instalments following transfer of the property, would not be affected by disclaimer. However, in this case Hughes was entitled to a net sum from the interaction with clauses providing for contributions to be paid by Hughes. Consequently, he was not entitled to these further sums while being released from his liability to contribute to the expenses.

Hughes argued that the disclaimer only applied to Chelverton and not to Groveholt. The Court held that this was not a case of a third party entering into a freestanding contractual obligation. The charge only secured what Chelverton still had to pay – which, after the disclaimer, was nothing.

Hughes was entitled to prove in the liquidation for his loss or damage from the disclaimer, for what that was worth.

he moral is not to have an overage that is expressed, so as to offset liabilities of the seller that remain to be quantified.

Restrictive covenants

It is common to secure overage indirectly by imposing a restrictive covenant on the property, giving the buyer or its successors the option to pay the overage so as to have the covenant relaxed. One difficulty is that the courts have traditionally regarded enforcement of restrictive covenants as protecting the value and amenities of the retained land. Depending upon the circumstances, the court might grant an injunction to restrain any breach of the restrictive covenant. However, this may not achieve the real aim of obtaining money, and in this situation the court will award damages instead of an injunction. The damages awarded will depend on the circumstances; they may well be less than an overage of, say, half the development value.

In the context of long-term overage, the seller may not inspect the property very often. What happens if there is some delay in commencing proceedings for breach of covenants?

Guidance was given by Bernard Livesey QC, sitting as a deputy judge of the High Court in Harris v Williams-Wynne [2005]. This was not a case involving an overage, but the principles are relevant to such deals.

The facts in Harris v Williams-Wynne

In 1988 the claimant, Harris, agreed to buy land from the defendant as additional land for the amenity of a farmhouse. Possession was given and the price was paid.

To save stamp duty it was agreed that a formal transfer be deferred until required within 21 years. The agreement imposed a covenant by Harris, for the benefit of the retained land, not to erect any buildings on the land sold, in view of this being within the Snowdonia National Park.

Harris created an unusual garden involving terraces, walls, other structures and follies. In 1991 he obtained planning permission for a two-storey garage and studio. Some work started in 1995 but it was not visibly different from the gardening features.

Foundations were installed in 1997. At the end of 1999 further building work began. The building reached first floor level in 2000. The roof was constructed during 2002.

Harris decided to sell the farmhouse and the additional land to buyers for £280,000. Requests were made for the defendant to transfer the additional land. In March 2003 the defendant’s solicitors supplied a copy of the 1988 agreement and said that there would be no transfer until further money was paid to compensate for the breach of covenant.

¶arris brought proceedings and obtained specific performance. He claimed damages for financial loss regarding the delayed sale. The defendant sought damages for breach of covenant.

There were disputes as to the facts. The deputy judge said that by early 2000 it must have been apparent to the defendant that some form of building work was being carried out. The defendant had taken no action to stop the breach. In the proceedings it was argued that there had been acquiescence and that neither an injunction (which was not sought) nor damages for breach should be granted.

The law

The deputy judge set out the legal principles:

1. Damages at common law are likely to be only nominal where the breach is of a negative covenant, as it is difficult to establish actual damage to the benefited land.

2. More substantial damages might be awarded under the remedy introduced by s2 of the Chancery Amendment Act 1858 (Lord Cairn’s Act, now re-enacted in s50 of the Supreme Court Act 1981), in lieu of an injunction, provided that the court ‘has jurisdiction to entertain an application for an injunction against a breach of… covenant’.

3. In this context, the court has the necessary jurisdiction if it existed at the time that proceedings were begun, whether or not an injunction is sought, or would be granted on the facts.

4. Entitlement to damages would be lost if there was such acquiescence as to make it unconscionable to rely on the covenant.

5. Damages should be awarded in such sum as might reasonably have been demanded as a quid pro quo for relaxation of the covenant that is breached, on the basis of a hypothetical negotiation, for a proper price (not a ransom price). This is usually based on predicted profit arising from release. (From past cases this might be anything between 5% and 50% of profit.)

6. The date for assessing damages is normally the date just before the building works are started.

7. In a suitable case, damages might be awarded for restitution rather than compensation; eg where there have been underhand dealings by the defendant. This did not apply here, as Harris had not been guilty of underhand dealings but had forgotten about the covenant in the 1988 agreement.

The result

The deputy judge said that a person’s behaviour will not usually be regarded as unconscionable unless it had an effect on the other person and caused them to act to their detriment.

The covenant here was an absolute covenant against erection of buildings. In Harris, standing by meant loss of a right to an injunction, but it was not unconscionable for the defendant to seek damages.

Having regard to some actual prices paid for relaxation of covenants elsewhere by the defendant, the deputy judge said that negotiations were likely to have reached a figure of £8,000. It does not appear that this was increased to allow for interest or inflation since June 1997.

Harris was awarded damages to compensate for loss of enjoyment of money on delayed sale of the property during 2003 (interest paid to lenders) and costs of insurance and water rates in that period. The defendant had not been entitled to delay transfer by reason of the breach of covenant by Harris.

This case shows the approach of the court to the award of damages where delay is not of such a nature as to prevent all right to rely on the covenant. © Property Law Journal