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Overage agreements & clauses

If you’re a landowner looking to sell off part of your portfolio, a little known legal term called ‘overage’ may have a big part to play in any future sale.

Every person involved in property disposals must consider the need for clauses which protect the seller’s right to a share in the future value of the land or property, and this is where an overage agreement comes into play.

Put bluntly, overage means securing the rights to any uplift in future value, and is commonly referred to as an anti-embarrassment provision. In most cases the provisions allow for a seller to share in the uplift in land values attributable to circumstances such as the obtaining of planning permission or the use of the property and land for a use other than that which it was used for at the time of the original sale. Overage clauses tend not to apply merely to increase in property prices attributable to typical and expected market forces.

Almost every deal today could involve an element of overage. But in order for an overage payment to be made, a trigger event must occur first.

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What is an overage agreement?

An overage agreement is a type of contract where the seller will be paid extra by the buyer if the specified events happen within a specified timescale e.g. if land sold is later developed and therefore the value increases significantly. Overage agreements are sometimes also known as claw-back or uplift agreements. There is no standard form of overage agreement but the most common is where an additional payment on top of the purchase price becomes due when planning permission for development is granted.

What is an overage clause?

An overage clause (often called a ‘clawback’) might be included in a commercial property or land sale to give the seller the right to receive further funds after the sale has completed. The land may significantly increase in value after a “trigger event” happens. The most common trigger event is the grant of planning permission but it can be . The overage clause would ensure the seller receives additional payment even though they no longer owner the land.

What are the trigger events?

A trigger event could be the granting of planning consent, or when a new development or use is implemented or completed. There are often problems when clarifying which events will trigger the need for an overage payment so it’s best to seek the advice of a solicitor from the outset.

What are the best ways to secure overage?

Overage can be secured by one or more of the following: a charge over the title of the land, a restriction on the title, a requirement for a direct deed of covenant from successors, or obtaining a guarantee.

However secured, it’s important that the overage period is long enough to enable the trigger to happen, because if it isn’t, the buyer might be encouraged to delay planning, which would postpone the trigger event even further.

It is also important that the overage, where appropriate, is not personal to the initial purchaser, but binds successors too. Many an overage provision has failed by the bound party transferring its interest to a non bound party.

A charge is one of the better forms of security for the landowner, since this provides a more secure mechanism to recover the overage amount when the trigger occurs. This charge does not secure anything until the trigger happens though, but when it does, if the buyer fails to pay the overage, the original landowner may be able to take possession and/or force a sale of the land to recover their payment out of the proceeds.

A charge is however unlikely to be acceptable to a developer or its funder. A restriction is more likely to be the preferred option, provided it does not prevent the developer from actually redeveloping and selling the land.

How do you calculate overage?

In calculating the enhanced value of the land, the buyer will expect inflation to be ignored and will want to deduct any costs they’ve incurred when generating the increase in value, for example, the costs of obtaining planning permission or perhaps re-mediating the land to make it suitable for future development.

If the overage land forms part of a larger development, it can be complicated to value it particularly if planning consent was only applied for on part of the overage land.

The provision of overage can be a complex area, though provided the legal provisions are drafted fairly and correctly, there should be little adverse affect. If they are drafted incorrectly, then they have been known to make properties or land unmarketable, perhaps a reminder why overage agreements are also known anti-embarrassment provisions.

    Overage agreement - top tips

    1. A buyer should ensure that there are clauses for a raft of deductions for example the costs of obtaining planning permission and even things like service provision. Try to be as specific as possible, for example obtain bat surveys, but be careful of admissions. Your lawyer should include a sweeper clause, which is an all-encompassing deduction clause.
    2. The trigger should be the commencement of work.
    3. One of the main issues is to be clear on what extinguishes the clause or releases it. Is it one-time only, or over the period of the clause, including many planning permissions. 
    4. Ideally, the release is a one-time only trigger - meaning that the canny purchaser could, in theory, release the clause by applying for a more modest (and therefore less expensive) planning approval that s(he) could enjoy, uplift-free, further down the line. 
    5. “Get it right first time,” is the motto of David Baybut. Clauses need to be set up properly so as to ensure there are no hidden effects. Many high street conveyancers who simply do not  know how to deal with them (they remain fairly niche in the world of regular property purchases) Using a specialist is vital to minimise  the negative effects. 

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