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Social benefit of affordable housing can’t save developer from damages in overage protection dispute

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Summary: The UK housing crisis puts the delivery of affordable housing into the spotlight. Affordable housing is of social benefit. How far do policy considerations influence the interpretation of contracts? The court faced that issue in an overage dispute. The outcome will concern developers.

Background          

A housing development site was sold to a developer.

Apart from the initial purchase price, the developer agreed to make an overage payment on completion of the development, equivalent to 30% of the any amount by which the total proceeds of sale from disposals exceeded a specified sum. To protect the seller’s right to receive any overage, the sale agreement restricted the types of disposal of the property as a whole, or of individual parts of it, which the developer was permitted to make.

Nevertheless, the developer was permitted to make a  " transfer … of land … for roads, footpaths, public open spaces or other social/community purposes".

Under the Section 106 agreement, the developer had to provide five units of affordable housing to one of a number of or private registered providers of social housing, one of which was AmicusHorizon. The developer initially considered that the sale of five units of affordable housing to AmicusHorizon at cost price would not be a permitted disposal.  So it began negotiations with the seller about the terms for approving a transaction. Before any agreement had been reached, and without prior notice to the seller, the developer completed the disposal of five residential units to AmicusHorizon. When the seller complained, the developer asserted that it was a permitted disposal.

Outcome

The transfer to AmicusHorizon was not a permitted disposal.

Reasons

The Court of Appeal held that it was implausible that the parties contemplated that a disposal of completed units might fall within paragraph (c), as a "transfer … of land … for … social/community purposes".  A disposal of completed units to a registered provider at cost price could have a significantly adverse effect on the calculation of the overage payment.

The words "or other social/community purposes" had to be read as being akin to the provision of land for roads, footpaths or public open spaces.

The provision of affordable housing units clearly achieves both social and community purposes.  The background knowledge available to the seller and the developer would have included the national and local planning policy with regard to the provision of on-site affordable housing. They must therefore have contemplated the possibility that such a requirement would form part of any planning permission for development.

These considerations did not overcome the crucial objection that the language of the agreement, read as a whole and in its context, did not cover disposals of completed units of affordable housing to a registered provider.

The consequence of the proposed transfer to AmicusHorizon not being a permitted disposal was that the developer needed to negotiate terms for a release from the restriction if it wished to complete its development of the site in accordance with planning. That is what the developer understood the position to be originally.  There was nothing unreasonable about that, particularly bearing in mind the adverse effect on overage that such transactions might potentially have.

The seller had a legitimate interest and expectation that the developer would not breach the sale agreement, reinforced in the present case by the fact that the parties had negotiated for three months. The seller was entitled to compensation for the loss of the opportunity to negotiate a reasonable price for releasing the developer from its contractual obligations. The benefit of the contractual restriction was a potentially valuable piece of property in its own right, and the seller was deprived of the opportunity to exploit it, for what it was worth, by the developer's unilateral action.

The court will assess the amount of the compensation in due course, if it is not agreed.

Comment

The developer could have avoided liability either by agreeing terms with the seller before completing the disposal; or by expressly agreeing that the disposal of the affordable units was permitted.

What is striking is that despite the planning policies in force, the public interest in affordable units being brought forward and the failure of the parties to agree terms after 3 months, the court could not assist.  The true meaning of the permitted development wording was found using a traditional legal analysis, not driven by policy requirements.

The lesson is that the sale agreement is the place to ensure that social purposes are served and that the private and public gain on development is fairly shared, without delay.

If you wish to discuss the issues in this piece or to follow up please contact: Roger Cohen, Co-lead Real Estate Disputes

Source: Burrows Investments Limited -and- Ward Homes Limited [2017] EWCA Civ 1577 - Court of Appeal 20 October 2017

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