What is an overage agreement?
Also known as claw-back or uplift, an overage is an agreement that the buyer will pay extra, on top of the original purchase price, if and when certain events happen. For example, if the buyer increases the value of the land by obtaining planning permission.
Overages are popular as they enable a seller to benefit from an increase in the value of their land after selling it. For example, if an individual sells land and the buyer subsequently gains planning permission to build 80 houses on them, the seller can claw back some of the increase in the land’s value.
An overage agreement can help a buyer purchase land or property for a lower initial price, with the proviso that the buyer commits to paying more if it gains in value.
The overage is usually defined as a percentage of the increase in value gained by permission for change of use or development.
What percentage the seller will receive is just the starting point for negotiations; there are many other overage variables that must be decided. It is advisable to ensure these are agreed before instructing a solicitor to go ahead with the sale or purchase.
In this article, we discuss five key factors to consider when buying or selling a property with an overage agreement.
1. Allowing cost deductions
It can be very expensive to obtain planning permission and satisfy s106 agreements and infrastructure requirements. The buyer will want these costs deducted from the final uplift payment; the seller will probably want to negotiate.
2. When is the payment trigger date?
An overage can have any number of triggers for payment. Sellers often stipulate that the uplift payment should be made when planning permission is granted. But that can cause problems for buyers. It can give cashflow issues, with buyers unable to accurately predict when or if permission will be granted.
A better option for the trigger date might be whichever happens first: implementation of planning permission or disposal of the land with the benefit of planning permission. This makes it easier for buyers to control the timing of the payment and factor it into cashflow.
3. How many triggers will there be?
There is often confusion in overage deeds about whether the overage ends after one payment is made or if it should pay out for every trigger event during the overage period.
Understandably, the buyer will want the former and the seller would prefer the latter. Whatever is agreed must be settled at the outset.
4. Which disposals are permitted?
Disposals such as the grant of legal charges, short leases or easements are not usually intended to be part of the overage. However, the agreement needs to spell out exactly which disposals are permitted, to avoid incurring unnecessary costs for giving consents.
5. Agreeing fees
Usually, the buyer is responsible for the seller’s costs in providing consent to a disposal, but where there are likely to be multiple plot sales requiring a large number of consents, there is often a period of negotiation.
In these circumstances, and in fact for all aspects of the overage, it is vital both parties are clear about the agreement terms to avoid complications and delays to exchange.
If you are buying property with a new overage, it is worth considering if you can afford to buy out the overage to speed up the transaction and potentially save costs.
For more information about overages or advice about interpreting or enforcing an existing overage deed, please contact Andrew Williamson or Louise Moore.