Overage clauses are fraught with pitfalls for both parties. Overage based on sales revenue raises a number of issues, which often are not immediately clear when the heads of terms first arrive in the parties' solicitors' inboxes.
The usual issues relating to the calculation of the revenue to be taken into account are whether the sales revenue is "net" or "gross", how you treat incentives given to buyers or what value you place on dwellings sold by way of part exchange. In the Morris Homes case the issue was - did the income from selling the ground rent reversion to leasehold flats count towards the sales revenue?
The question arose in the context of applying a formula in a varied agreement under section 106 of the Town & Country Planning Act 1990 to ascertain how much might be paid towards the provision of off-site affordable housing and other purposes. The variation incorporating the formula was agreed in 2013 in the context of a claim that the scheme of development approved in 2008 was no longer viable as the original planning obligations were too onerous.
The relevant element of the formula for calculating whether a further sum was due (and if so, how much) was "the actual sales revenue per square foot received from the disposal of the Units in that Phase". As it happened, the developer generated further income from the site by selling the ground rent reversions. The question at issue was simply - did this count towards such revenue? The matter went firstly to an independent expert under a dispute resolution clause, then to the courts, ending up in the Court of Appeal. The developer lost each time.
The grounds for refusing the appeal were broadly two-fold. Firstly simple interpretation. The ground rent sale was simply disposing of another interest in the units, so applying the usual rules of interpretation, the revenue was within the definition as it was also an "actual" receipt from such disposal. Secondly the purpose of the agreement needed to be considered. The council as planning authority needed to protect its ratepayers and the public purse, so it was consistent with this that it should take such income into account when calculating a payment to mitigate the relaxation of the previous planning obligations.
The second limb to the decision was probably unnecessary. In an overage clause on a sale a seller is seeking to benefit in any increase in sales revenue too, in lieu of receiving more by way of initial consideration on the sale. With the benefit if hindsight the result could have been avoided if the drafting specifically referred (for example) to the aggregate sales revenue from the first sales of individual completed units.
With the recent move against substantial ground rents by mortgage lenders and others the facts here are perhaps unlikely to recur, as valuable reversions are likely to become a thing of the past. The broader message though is that if you promise overage to someone on the basis that "if I do better, you'll get a share of it", don't be surprised if the court takes a dim view of attempts to reduce the amount by seeking to read qualifications into the drafting that are not there expressly.