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Case Study: Exchange with Delayed Completion Including Overage Clause

View profile for S. Tariq Mubarak
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We recently advised on and completed a purchase of a commercial property for £1.45 million for our client. Our client exchanged contract on this purchase over three and half months ago.

The negotiations and outline terms of this transaction were started much earlier, in the Summer of last year. The transaction took so long to get to exchange of contract because the commercial property was being sold by a Church associated charity who are known for moving slowly. Their multilayered levels of scrutiny of each transaction complicates matters and is naturally time consuming.

Our client is an experienced property developer and will be converting the property into residential units. They will retain some of the units on a Built to Let basis, for long term income yield whilst the other units will be sold off on long leases, to repay or reduce the mortgage loan. Our client opted for an exchange with delayed completion (of almost 3.6 months) because they were traveling abroad often to attend to other projects and they needed to arrange finance with their usual banker, a High Street bank for a commercial mortgage. The commercial mortgage was arranged after exchange of contract, but only because of the strength of their relationship with the High Street banker. We wouldn’t usually recommend clients to exchange contract without the finance being in place to complete the transaction.

The unusual aspect of this transaction was that the seller had introduced overage provisions into the contract/transaction. This was primarily because the seller’s agent at one point thought that our client was going to trade on the property by flipping (i.e. sub-selling) it onto another buyer for a higher price. Because the seller here is a charity, the selling agent had to ensure they were achieving the best possible market price on the sale of this property. If there was a possibility the price the property could be sold for is higher then because of the fiduciary duties imposed on the trustees of the charity, they would encounter some difficulties if they sold the property at a price below the market value of the property. To control/restrict our client’s ability to trade/sub-sell the property, overage provisions were introduced.

Under the overage provisions, if our client was to sell the property on wholesale to a different buyer for a higher price then our client would be liable to make an additional payment to the seller. The additional payment would be a proportion of the difference between the price they purchased the property for and the sale price they obtained from the third party buyer.

Since our client intended to develop the property into residential units and then sub-sell the units on the open market, it was important to carve out these ‘title split’ individual units from the overage provisions. By doing so, our client’s intention to develop and sub-sell each individual unit will not contravene the overage provisions. Also there was a unique/special concession agreed with the seller that if our client decided that they did not want to develop the property after obtaining planning permission but instead to sell it on to a third party developer or to enter into a joint venture with the third party developer then there are specific carve outs for that so that the overage provisions will not apply.

When we were going through the finance process with the bank (who had appointed their own lawyers for independent advice to themselves), the appointed lawyer tried to change the overage provisions. Bearing in mind contract had already been exchanged so the overage provisions had already been finalised and agreed, this was an unusual request, to say the least.

One of overage clauses the lawyer tried to amend was the anti-avoidance provisions. An overage clause should have a limitation period, i.e. a period during which the overage provisions apply. After that limitation period, the overage naturally no longer applies. Clearly, it is possible to structure a sale so that exchange of contract may take place during the overage limitation period but completion of the sale takes place after the limitation period. This would avoid the application of the overage clause but it is clear the structure/timing of the transaction is designed to defeat the overage provisions. Anti-avoidance provisions try to limit or restrict this so that the seller’s right to the additional payment is protected.

The lawyer acting for the Bank tried to change these provisions so that a completion of a sale after the overage limitation period would not be caught by these provisions. We had to explain to the lawyer that these anti-avoidance provisions are quite common in an overage closes for the reasons explained above. The lawyer fortunately relented after discussing it with a senior/supervisor and we proceeded to drawdown the mortgage advance, just in time for the scheduled completion date. This is why it is important to ensure only solicitors experienced in overage clauses are instructed to deal with such transactions.

Our client submitted their application for outline planning permission (see computer generated image of proposed redevelopment) and hopes to secure full planning permission for the site in the next few months.

 

About the Author

Tariq Mubarak is one of the top property solicitors in England, and he has helped hundreds of clients achieve success with their property goals.

Read more about Tariq’s background and his client’s successes.

Feel free to message Tariq here or e-mail him on tariq@matrix-legal.com or call his direct line: 02071861601

Contact

If you are interested to discuss more about anything mentioned in the article above, please call us on: 020 7186 1600, or e-mail us on: property@matrix-legal.com.

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