Full property update

Overage – can a seller apply for planning permission to trigger an overage payment?

A seller obtained planning permission for residential development of its land. The buyer entered into an overage deed, under which it agreed to pay an additional sum to the seller in the event that an improved planning permission was granted within five years. An improved planning permission was defined as a planning permission (including any variation) which had the effect of authorising a higher net internal area than that authorised by the seller's original permission (or any subsequent permission).

After the sale of the land to the buyer, the seller applied for, and obtained, two additional planning permissions, which authorised an additional net area of 1,900 square feet and 500 square feet respectively.

The seller contended that it was entitled to overage as a result of the planning permission it had obtained. It sought additional payments of £252,054 and £88,145.72 as a result. The buyer declined to pay on the basis that, under the deed of overage, payments were only to be made when it, the buyer, obtained planning permission.

The High Court, trying the matter as a preliminary issue, found in favour of the seller. The buyer appealed.

The Court of Appeal held that the overage deed only contemplated the buyer obtaining planning permission. It provided that the buyer had to notify the seller when a trigger event under the deed occurred. The buyer was then obliged to supply a copy of an improved planning permission to the seller within 10 working days of its receipt by the buyer. The Court of Appeal found that to read the deed as giving the seller a right to payment if it obtains permission would, in effect, require reading clauses into the agreement.

The court thought that its construction also accorded with commercial common sense. However, it was at pains to point out that it was merely deciding a preliminary issue, and that it had not delved into the facts. If the buyer had in fact played a part in the obtaining of the additional permissions, or if the seller had obtained the permissions on behalf of the buyer, the position would be different.

Things to consider

In September 2007 we reported on the decision in Johnson v Secretary of State for Communities and Local Government, where an applicant sought to quash the permission granted for conversion of his own house. The applicant had entered into an overage agreement when he purchased the site; the payment being triggered on the grant of planning permission. But, on appeal against an initial refusal of permission, the inspector granted permission for development of part of the application site. This was in fact unimplementable due to ground levels. The court refused to quash the permission and the payment under the overage agreement was therefore due, despite the fact that the development could not proceed.

In both of these cases, the buyer's position would have been put beyond doubt by drafting the overage provisions such that an additional payment was only to be payable on the implementation of an acceptable permission, not on the grant.

Micro Design Group Ltd v BDW Trading Ltd

Contract - will the court rectify an agreement so that a buyer is released from liability to pay overage?

In this edition of Property Update we are looking at two cases on rectification. In April 2008, we reviewed the case of Oun v Ahmad. This case concerned an application to rectify a sale contract to include additional provisions which the parties had agreed to deal with separately, outside the agreement. The High Court held that the parties' express agreement to omit the relevant terms from the sale contract meant that there was no mistake which could be corrected by rectification.

In Transview Properties Ltd v City Site Properties Ltd, the High Court again had to consider the issue of rectification where terms had been expressly omitted from an agreement. A sale agreement contained provisions for payment of overage to the seller on certain trigger events. However, the parties had also agreed that the overage would not be payable in certain circumstances. The difficulty was that the clause which provided for the abatement of the overage had been deleted from the final form of the agreement.

The buyer claimed that the clause had been deleted without its knowledge, as a result of sharp practice on the part of the seller. It therefore sought rectification of the agreement on the ground of unilateral mistake. The seller argued that the clause had been deleted at the buyer's request, and that the parties had agreed to deal with the matter by side letter instead. Unfortunately two different versions of the side letter were in existence; neither of which had been signed by both parties.

The judge found on the facts that the buyer had requested that the overage abatement clause be deleted from the agreement. This was because the buyer did not want to draw the abatement provisions to the attention of its bank, which was providing the majority of the funding for the purchase, in order to make the purchase price appear higher.

Since the sale agreement was executed in a form which was precisely in accordance with the parties' intentions, the court would not rectify the agreement to include the overage abatement provision. In any event, since the seller's solicitors had sent a draft of the agreement to the buyer's solicitors with the deletion of the clause clearly marked, the grounds for unilateral mistake would not be made out.

Under the side agreement, obligation to pay overage was to cease if the buyer paid off other debts it owed to the seller by a certain time. The two versions of the side letter differed as to the date by which repayment had to be made. The court found that the agreed form of the side letter was the one in the seller's possession. Under this version, the deadline for payment of the debts, and therefore for abatement of the overage, had passed. On this basis, even if the court had been minded to order rectification to reflect the side letter, it would have been of no assistance to the buyer.

Things to consider

In Oun v Ahmad, the buyer was attempting to force the seller to complete the sale. However, the parties' failure to record all of the terms they had agreed in one document meant that the main contract was unenforceable. This is because section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 provides that a contract for the sale or other disposition of an interest in land must incorporate all the terms which have been expressly agreed between those parties.

In Transview Properties, the dispute arose after completion of the sale. No mention of section 2 was made by the court. There is authority that an obligation on a landlord to contribute to the cost of fit-out works, which was contained in a supplemental agreement to an agreement for lease, remained enforceable even though it was not incorporated into the main agreement. This was because the lease had subsequently been completed (Tootal Clothing Ltd v Guinea Properties Management Ltd (1992)). In that case the Court of Appeal held that section 2 only applies to executory contracts, and has no relevance to contracts which have been completed. This may explain why it was not raised as an issue in Transview Properties.

Nonetheless, it is wise to exercise caution in the use of side letters and to ensure that, where used, they are incorporated into the terms of the main agreement. If they are not, the parties may find themselves unable to enforce the obligation to transfer the property/grant the lease, as well as the side agreement.

When does vacant possession not mean vacant possession?

In the second of our rectification cases, Bradbury Investments Ltd v Hicklane Properties Ltd, a tenant had a right of pre-emption over the freehold reversion. The landlord proposed to sell the building and the tenant exercised its pre-emption right. However, the parties could not agree on the price.

The price payable by the tenant was the "Open Market Value" of the freehold, which was defined as "the best price at which the sale of the freehold interest in the Premises…..would have been completed unconditionally for cash consideration by private treaty at the date of the Landlord's Offer Notice with vacant possession on completion of the sale…". The landlord contended that the freehold should be valued "with vacant possession", as stated in the valuation clause, and that the lease should be ignored. This produced a value of £2.9 million. The tenant argued that the freehold should be valued subject to the lease (value £250,000).

The tenant sought rectification of valuation provisions in the lease, arguing that they did not correctly record what had been agreed between the parties. At first instance, the judge found that the parties had both thought that what was to be valued was the freehold subject to the lease. He ordered the definition of Open Market Value to be amended to take out the words "with vacant possession on completion of the sale" and to add additional wording to make it clear that the valuation was to take into account the continued existence of the lease. The landlord appealed.

In order for a rectification claim to succeed, it must be shown that the parties shared a common intention on the matter in question. The landlord contended that it was insufficient to show that the words "with vacant possession" did not accord with the common intention of the parties. Each party's evidence of intention on the way the valuation formula would work had been different. The landlord therefore argued that the tenant had to go further and prove positively the existence of the parties' agreement or common intention on a formula for ascertaining the price.

The Court of Appeal disagreed. The issue before the judge was whether the words "with vacant possession" reflected what was agreed and intended by the parties to the lease. It was not pleaded that any other part of the valuation clause failed to correctly record their agreement. The fact that the parties explained their perception of the price to be paid in different language did not prevent the judge from finding that they had a common intention that the freehold interest was to be valued on the basis that it was subject to the lease. As for the remaining detail of the valuation, it was not an issue between the parties, and so it was unnecessary for the judge to make a fuller finding about their prior intentions on a valuation formula. The Court of Appeal held that the judge's conclusion made commercial sense.

The above analyses were written by Sarah Allen, associate in Wragge & Co's Real Estate group.

Mortgage fraud and a chargee's power of sale

Outline of the facts/decision

A third party fraudulently transferred Mr Guy's property and then secured a mortgage against his property in favour of Barclays Bank plc.

Mr Guy applied to the Court of Appeal to rectify the register and have the charge, in favour of Barclays, removed from the title (the High Court had decided that the charge should remain on the register). The Court of Appeal determined that it was possible to rectify the register in order to remove the registration of the void transfer, and for Mr Guy to be reinstated as the registered proprietor, but the mortgage to Barclays would remain (approving the original decision of the High Court). The Court of Appeal therefore dismissed Mr Guy's appeal and decided that Barclays still had a valid power to sell the property.

As Barclays' charge was correctly registered then it can exercise its power of sale and a subsequent purchaser from Barclays will acquire the property free from any interest or claims from Mr Guy. At the previous High Court hearing, Barclays submitted that it had found a buyer for the property and wanted to proceed with the sale.

The Court based its decision upon section 58 of the Land Registration Act (the Act). A transfer that is fraudulent is voidable. This means that it is liable to be unscrambled when the fraud is discovered. However, s.58 of the Act offers protection for third parties who rely on the register as conclusive proof of ownership. The effect of s.58 is that when a person is entered in the register as proprietor, the legal estate is deemed to be vested in them. This applies even if that person would not otherwise have legal title (e.g. because they derived title from a fraudulent transfer). Therefore, Barclays was entitled to rely on the conclusiveness of the register that showed the fraudster as proprietor when it took its charge.

Overriding interests

A chargee's power of sale will be subject to any overriding interests. Overriding interests are unregistered interests that override registered dispositions. One of the overriding interests, listed in the Act, is the interest of persons in actual occupation of a property. To establish this overriding interest a person must show that they were in occupation of the property at the time of the disposition (e.g. at the time of the transfer or when the charge was granted) and continues to be in occupation of the property. There are exceptions to this rule and the most pertinent are:

1. that an interest cannot be claimed where an enquiry was made, before the disposition, of the person claiming the interest and that person failed to disclose their interest when they could reasonably have been expected to do so; and
2. an interest:
   1. which belongs to a person whose occupation would not have been obvious, on a reasonably careful inspection of the land, at the time of the disposition; and
   2. of which the person to whom the disposition is made does not have actual knowledge at that time.

Accordingly, if an innocent party (e.g. the victim of the fraud) is in occupation of a property (the subject of the fraud) prior to the fraud and continues to be in occupation then, potentially, a chargee will be bound by their overriding interest. The question of overriding interests was not considered by the court in Barclays Bank Plc v Guy (as Mr Guy was not in actual occupation of the property). Potentially, a chargee's power of sale would be subject to the overriding interest.

However, s.58 only applies to registered land. In unregistered land, the rule that a fraudulent transfer will not pass a good title still applies.

Indemnity/rectification

A person in Mr Guy's position could seek an indemnity from the Land Registry in respect of the loss that they have suffered (in this case, the continued existence of the charge registered in favour of Barclays). An indemnity can be claimed from the Land Registry for a variety of reasons (eg. the Land Registry inputting incorrect information in the register and this incorrect information being relied on). The most pertinent reason in this instance is where a person claims for loss suffered due to the 'rectification' of the register. Rectification occurs when a mistake, in the register, is corrected and this correction prejudicially affects the title of the registered proprietor. In Mr Guy's case reversing the fraudulent transfer involved correcting a mistake (because Mr Guy never intended to transfer the land) but the registration of the charge was not a mistake (as it was registered correctly from the information appearing on the register at the time of grant). Accordingly, Mr Guy could only claim an indemnity in respect of the rectification of the void transfer. The innocent party will have to base their claim on the fact that their loss results from a mistake (i.e. the registration of the void transfer) and that this mistake could be rectified (in Mr Guy's case it was).

The original owner remains entitled to have the register rectified in their favour, although this will be subject to any third party rights that have been acquired in reliance on the information in the register in the interim. However, if the fraudster had sold the property to a bona fide purchaser, the right to rectification would be lost and the original owner (e.g. the innocent party) would be left with a claim for indemnity against the Land Registry. The payment of an indemnity may be reduced if the Land Registry can show that the claimant contributed to their loss wholly due to their lack of care. It is possible that a failure to inspect a property (i.e. to check whether the occupants match those listed in a mortgage application) or raise comprehensive enquiries, to establish whether the transaction is bona fide, may result in the award of an indemnity being reduced.

The Land Registry has recently changed its procedures and now stipulates that where an applicant is unrepresented their application must be accompanied by the Land Registry's standard identification form to prove their identity. This tightens the Land Registry's practice but is unlikely to stop a determined fraudster from submitting applications to change the register.

Unilateral notice

The judge in Barclays Bank plc v Guy suggested that Mr Guy could have protected his position by registering a unilateral notice against the registered title when he became aware of the fraudulent transfer. In fact Mr Guy instructed his solicitors to register a unilateral notice but they failed to do this before the Barclays charge was registered (the unilateral notice was actually registered the day after Barclays' charge). The registration of a unilateral notice would have alerted any potential buyers of the property, or Barclays prior to it granting the mortgage, to the existence of the dispute and Mr Guy's potential claim for rectification. If a person in similar circumstances to Mr Guy decided to follow this course of action then this would:

• (if the unilateral notice is registered before the grant of the charge) notify the mortgagee of the existence of the dispute and is likely to prevent the mortgagee granting the mortgage; or

• (if the unilateral notice is registered after the grant of the charge) not prevent any mortgagee exercising its power of sale but may impact upon the marketability of a property.

Releasing common land and town or village greens

The Department for Environment Food and Rural Affairs (DEFRA) has published guidance setting out its policy on granting consent to works on common land and on the release of land from registration as a common or town or village green (TVG).

The aims are:

• That the stock of common land and TVGs is not diminished. If land ceases to be registered, then land of at least equal benefit must be registered instead. The Commons Act 2006 requires exchange land where the land to be lost exceeds 200 square metres. But the guidance indicates that the Secretary of State will require exchange land to be given where any land is de-registered.
• That works only take place on commons if they maintain or improve the condition of the common for public interests, or its value in the local community.
• That use of any land registered as a common or TVG is consistent with that status.

The guidance sets out the criteria that the Secretary of State will apply to applications, the matters to be taken into account and detailed policy considerations for specific issues. These include exchange land, works on commons and applications with underlying public benefit (e.g. wind farms). The guidance can be found here.

This analysis was written by Jan Hebblethwaite, associate in Wragge & Co's Real Estate group.

Planning

Model planning conditions for development on contaminated land

On 30 May 2008, the Secretary of State circulated a set of model conditions for use by local planning authorities where development is to take place on contaminated land. Planning Policy Statement 23 (PPS23) advises on the circumstances in which it may be appropriate for authorities to grant planning permission in these circumstances. The new model conditions are intended to support the effective implementation of PPS23 policy. The Secretary of State confirms the advice in circular 11/95 that no condition should be imposed unless, in the circumstances, the condition meets the tests in the circular.

Briefly the conditions provide for:

• Development (other than remediation) not to commence until certain conditions complied with
• An investigation and risk assessment to be completed in accordance with a scheme agreed with the authority
• A detailed remediation scheme to be agreed with the authority
• Implementation of the approved remediation scheme
• Reporting of unexpected contamination found during development
• Long term monitoring and maintenance

The model conditions were circulated in a letter to local planning authorities.

Planning Policy Statement 12 published

Planning Policy Statement 12 (PPS12) sets out the Government's policy on local spatial planning, which plays a central role in the overall task of place shaping and in the delivery of land uses and associated activities. PPS12 explains what local spatial planning is, and how it benefits communities.

It also sets out what the key ingredients of local spatial plans are and the government policies on how they should be prepared. PPS12 should be taken into account by local planning authorities in preparing development plan documents and other local development documents.

Elements of PPS12 include:

• Identifying suitable land and timescales for the provision of affordable housing
• Addressing climate change and sustainable development including better public transport
• Ensuring that infrastructure (e.g. schools and health centres) is in place
• Attracting private investment

PPS12 also confirms the Government's commitment to the proposed Community Infrastructure Levy, despite the controversy surrounding it and the concern of local government as to the lack of resources available to deal with the local devolution agenda generally.

Public funding for regeneration projects – funding guide

The British Property Federation (BPF) (with Davis Langdon) has published a guide to assist developers in accessing public funding for regeneration projects.

The BPF press release states:

"It is hard to know what funding is relevant for a proposed development and where to begin looking for this money. This guide takes you through the basic steps of how to apply successfully for the right public sector funding, it lists the main bodies that offer this financial support and provides an extensive list of funding opportunities that exist currently.

Public sector funding is rather fragmented, with different initiatives coming from a range of public bodies that have insufficient funding allocations to meet all the competing needs. This means that under-funded, poorly coordinated schemes are often oversubscribed, with good quality schemes having to compete for the cash."

This analysis was written by Jan Hebblethwaite, associate in Wragge & Co's Real Estate group.