Making Overage Stick

A Paper to the Northern PLA

Oliver Radley-Gardner K.C.

Falcon Chambers

?

The Legal Problem With Overage

1.???? This paper is concerned with the legal problem presented by the simple fact that an obligation to pay is a positive obligation, and Week One of the Contract Law course tells us that you cannot contract to burden a third party, and Week Four of the Land Law course tells us that positive covenants do not run with the land as property rights, subject to the narrow principle of mutual benefit and burden (and, for some reason, fencing obligations). ?

?

2.???? For those with a deeper interest than what I can delve to in the time I have, I would recommend to you an article in the Conveyancer, (2022) 86 347, by David Sawtell, called “Overage Agreements and Temporal Aspects of Property Development in English Land Law”.?

?

3.???? Draftspersons have there been, and had to be, clever in devising machinery to protect overage that seeks to replicate the effects of a property right – and in particular the special one, that it binds third parties who never agreed to it originally.

?

4.???? This section will look at the different mechanisms and consider their benefits and shortcomings.

?

Mechanism One: Restrictive Covenants

5.???? One popular mechanism for securing overage is attaching them to a set of restrictive covenants – usually not to build, or only to build a limited number of houses, or not to use for a specified purpose. The idea is that the covenantee will have the ability to release or waive those limitations, usually upon the payment of overage sums once the relevant trigger (e.g. the securing of a detailed planning permission) is reached.

?

6.???? We all, of course, know that negative covenants restrictive of the user of the land are property rights. It is why there is still a garden in the middle of Leicester Square: Tulk v Moxhay. So, on the face of it, the coupling of overage to a restrictive covenant seems like a clever way to get around the problem of third parties.

?

7.???? The fact that the restrictive covenant has been coupled to a payment obligation can, however, give rise to inherent problems. Valid restrictive covenants benefit land and not wallets. A restrictive covenant is a property right because it accommodates the benefited land in some way. By the same token, on discharge or modification, the fact that a covenant merely preserves a ransom position is an insufficient reason to object to an application under section 84: Broomhead & Ors, Re Law Of Property Act 1925 [2003] EWLands LP_7_2001. It may of course be quicker (in the right case) to get a declaration from the Court that the covenant does not bind at all, as section 84 can be an involved process.

?

8.???? This is what justifies a restrictive covenant being a permanent property rights (subject to discharge or modification under section 84 of the Law of Property Act 1925). If a restrictive covenant is expressed to be for the benefit of identified land, the starting presumption is that it does so: Marten v Flight Refuelling Ltd?[1962] Ch 116; Wrotham Park Estate Co Ltd v Parkside Homes Ltd?[1974] 1 WLR 798. This is so unless the covenant could exceptionally be shown to have been capricious or not bona fide. It is for the covenantor’s successor to prove that there is no such benefit: Lord Northbourne v Johnston & Son?[1922] 2 Ch 309.

?

9.???? If, however, the object of the covenant is to protect the payment of money, it is not “accommodating land”, and may therefore not be a? restrictive covenant at all: Stockport MBC v Aliyah Developments Limited (1983) 52 P.&C.R.278. Equally it may cease to be such a covenant if it accommodated land at the beginning but then ceased to do so: Dano Ltd v Earl Cadogan?[2003] EWHC 239 (Ch).

?

10.? An extreme illustration of that is to be found in the case of Cosmichome Ltd v Southampton City Council [2013] EWHC 1378 (Ch). There, Southampton City Council owned land which included the site that had become vested in Cosmichome. The site was the former headquarters of the BBC. The BBC had acquired the site for ￡1 from the Council, with a very restrictive covenant stating it could only be used as headquarters for the BBC (and associated franchises). The BBC then built its headquarters, and contributed towards the cost of building an adjacent multi-storey car park.

?

11.? That covenant had a carve-out that stated that “this covenant may be removed by the written Agreement under Seal of the Council ("the Discharge") and a further covenant that where this restriction is lifted and planning permission granted for any use other than radio television studio with ancillary offices 50% of any resulting enhanced value accruing on the Property shall be paid by the owner for the time being of the property to the Vendor ("the Development Charge")”

?

12.? The question for the Court was whether the covenant was in the nature of a restrictive covenant. It decided that it was not. The putative successor to the burdened land successfully argued that the obligation to keep the premises as built as BBC headquarters only was of no conceivable benefit to other land owned by the Council, the covenantee, whether when the covenant was entered into or at the date of the trial.

?

13.? The judge held:

?

a.???? That the land use in the area was so mixed and varied that there was no plausible basis on which it could be said that keeping the building as BBC headquarters would have any material impact on other Council-retained land;

b.???? The BBC headquarters were for employees only, and did not draw the public into this part of Southampton to use other Council-held facilities, which might have furnished a plausible argument that other Council-held land was accommodated.

?

14.? This case, to which not a great deal of attention has been paid, is an important note of caution for anyone asked to advise or negotiate an overage agreement. Obviously if there is no land benefited at all, the overage machinery won’t bind successors as part and parcel of a scheme of restrictive covenants. However, even if there is land, if the Court is persuaded that the sole (or arguably dominant) purpose of the machinery is to extract a payment from a successor, that will mean that the burden of the covenant will not run, and therefore the overage provision will not be “sticky”.

?

15.? A point that has so far not been fully explored in the cases is the extent to which a restrictive covenant, riding upon the back of which is riding an overage clause that is a positive obligation to pay which would otherwise not run, can be severed and held invalid.

?

16.? The short point here is that one cannot escape the legal position that the burden of covenants cannot run if those covenants are positive by jumbling positive and negative obligations together:

?

a.???? ?In some cases (such as cases not to develop without seeking prior approval of plans and elevations from the covenantee), a positive step to be taken by the covenantor is treated as part of the overall negative obligation – not to develop at all, unless condition X and Y are complied with is treated as, in substance, a restriction capable of running. That is simply a manifestation of the general principle discussed in? Shepherd Homes Ltd v Sandham (No 2) [1971] 1 W.L.R. 1062 that negativity is a question, not for form, but of substance.

b.???? In other cases, there may simply be a tangle of unrelated obligations, some positive and some negative (=restrictive), and a Court or Tribunal can untangle the knot and sort them into negative obligations (which run) and positive obligations (which don’t). That is what happened in Westminster CC v Duke of Westminster [1991] 4 All E.R. 136, where some covenants could be considered by the Upper Tribunal under section 84, but not other, positive ones. The mere fact that positive obligations have been shuffled into the deck of negative ones doesn’t change the general law.

c.???? Where do overage obligations stand under this, first, mechanism? We have already seen that the fact that they are tacked onto restrictive covenants does not mean that they run if the underlying restrictive covenant does not have land that it correlatively benefits, or has land identified which is in fact not benefited, or if it can be shown that the restrictive covenant is there as a mere ruse to deceive the reader into thinking that the positive obligation will run. Might there be a further point, that in truth the negative obligation if genuine and otherwise a perfectly good restrictive covenant (e.g. not to build) ought to be split, using the judicial scalpel, from the positive obligation (e.g. to pay overage), so that the former runs and the latter does not? If the payment obligation is purely parasitic on the negative obligation, and not a genuine qualification and part of it, and if it would not withstand scrutiny as a freestanding clause, why should it make a difference that it has been cunningly interwoven with a restrictive covenant? So far that argument has been dismissed, on the basis that it is no different in substance from the types of perfectly permissible scenarios in a. above. After all, you are only liable on the overage if you breach the covenant; you are not independently liable to pay overage. It may all depend on the drafting after all, but it certainly a point that merits consideration.

?

17.? Nor (of course) will Halsall v Brizell [1957] Ch 169 mutual benefit and burden ride to the rescue here. The restrictive covenant is a burden, and the overage obligation is also a burden, and the doctrine is not called “mutual burden and burden”. Nor would you expect to be able to find some benefit in the same conveyance with a sufficient connection to an overage payment to bring the principle into play by some other means. It is for this reason that Halsall gets only two mentions in the entirety of Christopher Jessel’s Development Land Overage and Clawback, the only dedicated book on this topic.

?

18.? It is also important to note that a particular form of common negative obligation, a restriction on alienation, will probably not count as a restrictive covenants. This is often an obvious obligation to which an overage provision is appended. This is because the cases appear to draw a distinction between restrictions on the use of land (which is properly the subject matter of a restrictive covenant) and? restriction on the ownership rights of land (that is, the owner’s dispositive powers), which is not the subject of restrictive covenants and which cannot run as freehold covenants (though of course they are common in the leasehold context): see Cosmichome, but also Manchester Ship Canal Co v Manchester Racecourse Co [1901] 2 Ch 37; University of East London v Barking and Dagenham LBC [2004] EWHC 2710 (Civ); note the obiter dictum to the contrary in Hemingway Securities Ltd v Dunraven Ltd [1995] E.G.L.R. 61. We will need to go back to the 13th Century when we are considering the next mechanism to identify why such a clause may be quite problematic.

?

19.? The restrictive covenant machinery does not appear to have the requisite adhesive quality to make overage reliably sticky.

?

20.? That leads us to the second piece of machinery one might wish to operate.

?

Mechanism Two: Limiting Alienation

21.? This mechanism seeks to make overage sticky by replicating the substance of a property right – that it binds and burdens third parties – by (in effect) obliging the original obligor to ensure that any successor in title effectively novates the overage agreement upon disposal, usually by entering into a direct covenant replicating the terms of the original overage agreement (Jessel suggests that the assignment of the benefit of overage requires the entry of a brand new restriction: see at 3.4.4). This is the “chain of covenants” method, and it has found widespread practical favour.

?

22.? Under sections 40, 42 and 43 of the Land Registration Act 2002, a restriction can be entered into to restrict the registered proprietor (or other person within section 43(1)) from dealing freely with the land. The scenarios envisaged are to ensure that any dealing is lawful and valid (section 42(1)(a)), to protect overreachable interests (section 42(1)(b)) and to protect “a right or claim in relation to a registered estate or charge” (section 42(1)(c)). An overage claim is assumed to fall within section 42(1)(c). Sometimes the right to overage is further secured by a legal or equitable charge (see Land Registry Practice Guide 19 at paragraph 6.16). There is often a contractual obligation to submit to such a restriction.

?

23.? The form of restriction is that a disposition can only be registered with the consent of the overage owner (or certification by their conveyancer), who will presumably only give consent it they have received an acceptable substitute deed of overage from the prospective transferee. There is a template restriction in the form of Form N, contained in the Practice Guide at Appendix B, para 7.14.

?

24.? The Land Registry has not been keen to accept restrictions under which the transferee is registered upon production by them to the Land Registry of a deed of overage, as this places the onus on the Land Registry to check that there has been compliance. Under the overage owner’s consent-type restriction, the burden and risk of that falls on the overage owner.

?

25.? Although popular, the chain process is of course unwieldy. It requires compliance with the certification and consent processes, and we know that those processes can go wrong. Whether or not a particular step has been taken to comply can be open to interpretation, and the chain (like the chain of indemnity covenants applicable to positive covenants generally) is only as strong as its weakest link. The main solvent that leads to overage under this mechanism coming unstuck is therefore user error.

?

26.? There may however be a much more fundamental problem than that. Obviously the Land Registry has endorsed this means of protecting overage to a degree by including it in its Practice Guide. It has been at least acknowledged as a permissible route in Akasuc Enterprise Ltd v Farmar & Shirreff [2003] EWHC 1275, in which Peter Smith J expressed the view that a modern court would be unlikely to strike down any modern commercial arrangement for technical reasons. He said at paragraph [87]:

?

[T]here must be many thousands of restrictions entered on registers and titles around the country in the form in question. For example, registered chargees have restrictions, entered as a matter of course. Another example is the sale of council houses, subject to a repayment discount, which contains almost inevitably a restriction preventing a sale without repaying the discount. Similar restrictions are to be found to protect agreements under section 106 of the Town and County Planning Act 1991, but I accept that the validity of such restrictions in the context of this statute has not been argued. [Counsel] equally did not wish to argue the point. I express no concluded view, but I would be surprised if the courts would with full arguments strike down the power imposed by statute to put restrictions on title under the LRA 1925. It is not necessary for me to come to a conclusion, because the issue would only arise when Mansard's position was considered in July 1997, when it would seek to sell on the Property. At that time I am of the opinion that any developer would conclude that a restriction would probably be a successful way of protecting overage payments

?

27.? That passage deals with a passage in the first edition of Mr Jessel’s book (and discussed in the second edition of Development Land Overage, at 3.4.7). The doubt expressed in that passage relates to the fact that the Statute of Quia Emptores 1290 expressly provided that freehold fees simple should be freely alienable. Mark Wonnacott KC, in his excellent book Forgotten Land Law, makes the point that the fact that the Land Registration Act 2002 allows positive covenants (like covenants to pay overage) to be protected by a restriction would appear, on the face of it, to offend against what is said in Quia Emptores – it “derogates” from that, in his words (p. 19). This is all the more the case with a? provision that expressly seeks to forbid alienation, whether by restriction or by express covenant – in both such cases, the provision is void because it precludes free disposition of the fee simple at all.

?

28.? The second aspect of that problem is one of policy. Were restrictions intended to operate so as to make positive covenants binding on successors, in effect circumventing the rule at law that their burdens could not pass? And, arguably, has one not thereby created a new property right in breach of the restriction on new rights in sections 2 and 4 of the Law of Property Act 1925?

?

29.? Those points might be debated in future, but it seems likely that the answer to the above is that given by Peter Smith J twenty years ago – there might be an interesting theoretical argument, but the practice of protecting overage by this means is so widespread, and continues to be so widespread, that it would be a brave judge who drove a coach and horses through the entire industry. Nonetheless, some awkward questions remain to be answered, and at the moment we are all, collectively, doing a good job of pretending that they don’t exist.

?

Mechanism Three on Steroids?

30.? One possible solution to the problem is to back the payment obligation, which is uncertain and based on future contingencies, with some form of security. The estate rent charge would not be suitable, as the Rent Charges Act 1977 seems to me to exclude the overage scenario. It may be possible to attach the obligation to a right of re-entry. However it seems unlikely that anyone would be crazy enough to agree to that. Finally, it might be possible to back the clause up with a charge (and the restriction).

?

31.? As it is a future contingent debt, that would probably have to be an equitable charge: Amari Lifestyle Ltd (t/a Amari Super Cars) v Warnes & Ors [2017] EWHC 1891 (Ch), paragraphs 30 and following; though compare In Re Rudd & Son Limited, The Times, 22nd January 1986.

?

32.? Those are all possibilities. However, the law of overage remains fraught with drafting traps and legal trip-wires, of which I have hopefully been able to illuminate some.

?