Court of Appeal's strict interpretation of overage agreement

The Court of Appeal has upheld an obligation to pay overage where a proposed conversion project received planning consent but would breach building regulations if carried out.

London & Ilford Ltd v Sovereign Property Holdings Ltd concerned the redevelopment of an eight floor mixed use commercial building. London & Ilford bought the property from Sovereign and planned to convert the office accommodation into residential units. The purchase price was over £7 million and the parties agreed that an additional £750,000 overage might become payable.

The overage agreement stated that the additional sum would become due on the occurrence of a 'first trigger event' within the overage period. In essence this required the approval of the local authority to a change of use of the property to 60 residential units under the permitted development order.

The relevant part of the Town and Country Planning (General Permitted Development) Order 2015 operates to authorise a change of use of property from office accommodation (Class B1(a)) to residential use (Class C3). But first a developer must apply to the local planning authority for its prior approval to four specific matters relevant to the development. These encompass issues of transport, contamination, flooding and noise.

The local authority's approval was given within the overage period. Accordingly, Sovereign's case was that the overage payment became due. It obtained an order from the High Court, to that effect but London & Ilford appealed.

London & Ilford claimed that, whilst the planning requirements had been satisfied, the 60 residential units could not be lawfully constructed as this would contravene fire safety provisions in the building regulations. It argued that the definition of 'first trigger event' in the overage agreement should therefore be construed as referring to 60 residential flats capable of construction.

The decision

The Court of Appeal's decision was robust - the overage agreement did not support London & Ilford's interpretation. It gave the words their natural meaning and held that the full overage payment was due.

The trigger events for the payment of overage were clearly and expressly concerned with the change of use. The trigger for payment of the overage was the prior approval of the local authority under the permitted development order. The order itself was of relevance to the overage agreement only in so far as it permitted the change of use of the property subject to the four matters that needed the approval of the local authority. None of those four matters were relevant to the issue in hand.

The court recognised that the regime for planning and development consent is entirely separate to the regime for building regulations in its purpose, legislation and enforcement. The overage agreement made no reference to compliance with building regulations and this should have been spelled out if it was a concern.

Comment

Cases that require a court's interpretation are difficult to predict and in this case the court took a literal approach. This can be readily understood by its observations that both parties were sophisticated developers who had both been advised by experienced solicitors. The agreements were 'complex and professionally drafted' and the court evidently expected the parties to ensure that the documents set out the agreement that had been made between them and included whatever was important to them. In this case the court was not prepared to fill any alleged gaps by construing the agreement in such a way as to give it any meaning other than its natural one.

London & Ilford Ltd v Sovereign Property Holdings Ltd [2018] EWCA Civ 1618