Quite often, the particulars on the sale of property and/or land refer to the sale as being subject to “overage”, “uplift” or “clawback” terms. For the purpose of this article, these terms are referred to as overage. Overage agreements are becoming increasingly popular in land sales, and therefore constitute an important feature for both Buyers and Sellers to carefully consider.
The term “overage” is generally used to describe the situation where it is agreed that a Seller may share in any increase in value realised on the future sale of the property.
The purpose of imposing overage terms from a Seller’s point of view is to maximise potential financial return from receipt of the sale price and, in addition, a share of any increase in value due to planning permission being obtained and/or the property being subsequently developed. This is usually only put in place when there is a reasonable expectation that the property will be developed in the future. However, we are increasingly seeing overage terms imposed on land which may not have any expectation of development in the next few years, yet the overage term is for 30 or 40 years, for example, to consider that there may well be changes to planning policies within the stipulated period.
From a Buyer’s perspective, entering into an overage agreement could, on one hand, serve as a prevention from purchasing the land at a higher price based on its potential development value, which may never come to fruition. On the other hand however, overage agreements can be rather complex, which can be costly and may potentially prolong a transaction. For Buyers, consideration may need to be given to whether it would be more beneficial to purchase the land at a higher initial cost.
There are many terms to negotiate and determine before entering into an overage agreement. It is therefore advisable for the parties to agree all key terms before instructing a lawyer to proceed with the sale or purchase. This will enable the lawyer to draft the terms of the overage agreement in a time and cost-effective manner, reducing the need for prolonged negotiations.
Some key points to consider at the outset include:
- Tenure of the overage: This is typically in terms of years. We would usually advise against terms agreed for the lifetime of a Seller, as this can be difficult to deal with in the future. For example, if the Seller moves abroad, it may prove difficult to trace them and whether they are still living.
- What will trigger a payment under the overage – i.e. is it to be on implementation of a planning permission and/or on the sale of the property with the benefit of planning permission? Grant of a planning permission can also be a trigger. However, this is becoming less popular. Buyers are opposed to agreeing such a term because they would need to pay an overage payment even if they do not carry out, and/or have the benefit of the development granted under the planning permission. Also, a planning permission could be applied for by a third party.
- Calculation of the payment due under the overage: The important points to note here are the percentage of the increase in value the Seller will receive and whether any deductions can be made from the payment for the cost of obtaining the planning permission.
- Will every development trigger an overage payment? Not necessarily. Often on the sale of agricultural land, any development for agriculture will be excluded from the overage terms. Another point to consider, especially where there is a house on the property, is the fact that it is often agreed that any extension to the house will not qualify as a trigger for payment due.
- Successors in Title: It is usual for the terms of the overage to be binding on future owners.
We would recommend that these key points are thoroughly considered by both parties when negotiating a sale which would be subject to an overage. The particulars of each sale, as well as the circumstances of each client are different, and as such, it is more than likely that there will be other terms unique to each transaction. There is rarely a “one size fits all” overage. However, if the key terms are agreed at the outset, it facilitates the process, such that the overage agreement prepared by the Seller’s lawyer should not require any extensive re-drafting upon receipt and review by the Buyer’s lawyer.
Our Agricultural and Commercial Property Teams are made up of legal experts, who regularly deal with transactions for Buyers and Sellers with a variety of overage terms. If you are considering entering into a new overage agreement or varying the terms of an existing one, please do not hesitate to contact us for more information and skilful guidance aimed at protecting your best interests.
