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Propcos e-briefing: The best laid plans of mice and men

    • Real estate sector

    03-07-2013

    Securing the right to receive overage following the sale of property requires careful thought. A failure to put the correct structures in place can be costly as Southampton City Council discovered in Cosmichome Ltd v Southampton City Council [2013] EWCG 1378.

    In this case, the Council had sold land to the BBC for £1. The BBC developed and used the property as broadcasting centre. In the 1989 transfer of the property to the BBC, the BBC entered into a restrictive covenant with Council to use and occupy the property itself as a broadcasting centre. The covenant was expressed to be for the benefit of the Council’s adjoining land and to bind the BBC’s successors in title to the property. The terms of the covenant provided for the Council to release the covenant at its discretion with a proviso that if planning permission were obtained for non-broadcasting use, the release would be subject to the payment of 50% of any uplift in value of the property.

    In 1989, the BBC entered into a sale and leaseback arrangement with Cosmichome and continued to occupy the property under a 25 year lease. Cosmichome successfully argued before the court that it was not bound by the terms of the restrictive covenant, paving the way for a potentially lucrative redevelopment of the property in the future. It succeeded because the judge found that the covenant was, in reality, a money payment covenant designed to protect the right to overage. Although it was expressed to benefit the Council’s adjoining land, on the evidence available to the court it did not protect or preserve the amenity or value of the Council’s adjoining land. As a “money payment” obligation, it therefore did not bind the BBC’s successors in title.

    This case confirms the view that using restrictive covenants as a means of securing the right to overage is not a satisfactory method of doing so. Imposing a restrictive covenant may form part of the structure used to protect overage, but it should not be relied upon as the sole means of protection.

    The transfer to the BBC in 1989 also included a right of pre-emption in favour of the Council. If the BBC no longer required the property for their own use and occupation, the BBC had to notify the Council who would then have a three month period in which to elect to purchase property back from the BBC.

    The judge held that the sale and leaseback to Cosmichome in 1984 did not trigger the pre-emption provisions. However, because the right of pre-emption had not been properly protected on the title to the property and created only personal rights between the Council and the BBC, Cosmichome acquired the property free from the right of pre-emption. A lack forethought on the part of the Council both in how the right of pre-emption should have been protected and how it would apply if the BBC sold the land but continued in occupation meant that the right of pre-emption has now been lost.

    In considering the status of the right of pre-emption, the judge also held that a right of pre-emption, unlike an option, is not subject to the 21 year perpetuity period in section 9(2) Perpetuity and Accumulations Act 1964. Although the rule against perpetuities has been abolished in respect of land transactions entered into on or after 6 April 2010, the old rules apply to options and rights of pre-emption entered into before this date.

    The position for historic rights of pre-emption is that, unlike options, they are not subject to the 21 year perpetuity rule. If the right of pre-emption matures because the owner is obliged to offer the land to the buyer, this creates an option for the buyer to acquire the land. This later option is subject to the rule against perpetuities the judge said but the relevant 21 year period then runs not, as a previous case had held, from the original grant of the right of pre-emption, but from the date of maturity.

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