Take nothing for granted with ‘claw back’ agreements

Apr 16 2008 by Richard Freeman-Wallace for The Journal

OVERAGE can be a future blessing, but because of its increasing complexity, it can also cause problems for buyers and sellers of property.

Overage (also called “claw back”) is a sum of money over and above the original sale price that a seller of land may be entitled to receive following completion of the sale, if a certain event takes place.

For example, a farmer may sell a piece of land to a developer who is likely to obtain planning permission for offices.

However, once the sale has taken place the developer might acquire planning permission for houses to increase the site’s profitability – and so the farmer could lose out on the increased value of the land.

The parties may agree that a certain price will be paid on completion, but if the developer gets planning permission for residential use within a specified number of years, the seller will receive more money.

Overages may seem a perfect solution to persuade a reluctant landowner to part with property. In practice, however, they can cause problems.

Because overage provisions are now pretty complex contracts, many people think that if an obvious mistake is made you can always get the contract rectified. However, the recent case of Chartbrook v Persimmon Homes which was decided in March 2008, shows that this is a false hope.

Persimmon signed an agreement, which contained an overage clause, to buy land from Chartbrook.

The two parties agreed that the final price Persimmon would pay would include a sum based on the profit from the sale of apartments.

The housebuilder intended that the additional payment would be the greater of 23.4% of the net proceeds of the flats or a minimum guaranteed payment, based on £76.34 per sq ft.

Persimmon’s solicitor, however, drafted in the agreement that this payment would be the total of the two sums, rather than the greater of them. As a result, Chartbrook was overpaid by £3.52m. Persimmon took the case to court, arguing that the clause was incorrectly drafted, and that the weight of all prior negotiations and documentation supported its assertion.

Even though it was clear that it did, the Court of Appeal accepted Chartbrook’s case that it had not realised a mistake had been made. Persimmon’s evidence from prior negotiations was ruled inadmissible.

The housebuilder was liable to pay Chartbrook £9.17m rather the £5.58m it had expected.

Overage can be a useful device, allowing transactions to proceed on commercially acceptable terms for both parties, when present circumstances make it less than perfect for one of the parties.

Because of the overage’s commercial significance it is likely to be negotiated early on in the life of a transaction. Once it has survived to the later editions of the draft contract there can be a tendency not to question it. People assume that it must be correct and that testing of it has already taken place.

As the Persimmon case shows, no-one should assume anything – least of all with overage contracts.

Richard Freeman-Wallace is head of property at Watson Burton LLP.