Using restrictive covenants to secure overage payments

Using restrictive covenants to secure overage payments


Author: Chris Dolan and Cara Beveridge

In the recent case of Cosmichome Ltd v Southampton City Council, the High Court considered the suitability of using a restrictive covenant to secure an overage payment.

Overage is a deferred payment which a seller may be entitled to demand after completion of a disposal of a property if a specified condition is met.

An overage obligation must be protected by the seller so that it can be enforced against successors in title to the buyer of the property as well as the buyer itself because the obligation to pay may arise after the original contracting buyer has sold the property on. Without adequate security in place, overage provisions can prove virtually worthless.

The fundamental legal problem is that the obligation to pay overage is a positive obligation and, as such, it does not 'run with the land'. This means that it is not automatically enforceable against successive owners and a means of enforcement has to be found.

The background to the Cosmichome case was that the BBC acquired a property in Southampton and constructed a purpose-built studio and administration centre on the site. The transfer to it contained a restrictive covenant confining the use of the land to broadcasting by the BBC. This restriction could be lifted upon payment of a 'development charge', i.e. an overage sum.

The transfer also contained a right of pre-emption: were the BBC no longer to need the land for broadcasting, it would notify the council, which could require it to sell the property back to the council. If the council chose not to do so, the BBC would be free to dispose of the land elsewhere, subject to the development charge.

In 2004, the BBC informed the council of its intention to sell the property and take a 25-year lease back and remain in occupation of the property. The council did not exercise its right of pre-emption. Cosmichome bought the land as planned, then asked the court for a declaration as to the enforceability of the restrictive covenant which purported to secure the development charge.

The court said that in order to be enforceable against successors in title to the original contracting party (the BBC), a restrictive covenant must, at the time it was imposed, have been intended to and to have been capable of benefitting land of the covenantee (Southampton City Council). This was not the case.
The covenant was in effect a monetary obligation rather than a restrictive covenant in its true sense. It was not intended to protect or preserve the amenity or value of the council's adjacent land and so it did not bind Cosmichome as successor in title to the BBC.

Indeed, the balance of evidence suggested that the covenant was imposed for two reasons:
. in order to keep the BBC at the site
. to serve as a mechanism for extracting a payment if and when the BBC should seek to move elsewhere

What does this mean?
This recent case demonstrates that the courts can be 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.

This shows that careful consideration must be given to the method adopted to secure the obligation to pay overage to ensure that it is the correct approach having regard to all of the circumstances.