What is overage?
Overage – also sometimes known as “clawback” – is a mechanism to enable a seller to share in any potential increase in the value of the land they are selling.
Overage is notoriously complicated and the negotiation of the required documents can delay transactions. It is essentially a gamble, as the seller may ultimately not receive any overage if either the overage trigger events (see below) do not actually occur during the overage period or (if they do) if there is minimal increase in the value of the land. Sellers should therefore carefully consider whether it is worth the extra time and cost involved in negotiating overage provisions that may or may not result in a windfall at some point in the future, or whether they would actually prefer to have the certainty of a higher, fixed purchase price immediately. Buyers are more likely to pay a lower purchase price if overage is involved, as this will affect their own profits. However, the seller needs to weigh this against the potential bonus that they may receive if the land value does increase significantly in the specific agreed circumstances.
When does overage become payable?
This is a matter for negotiation at the time the initial sale is agreed. There are various circumstances which are commonly agreed as “triggers” for overage to become payable. The most common are:
- The grant of Planning Permission
- The implementation of a Planning Permission
- The disposal of the land with the benefit of Planning Permission
The parties may agree that overage will be payable if any planning permission is obtained, or might agree that it should only be payable in specific circumstances, or might agree specific exceptions for which it will not be payable.
If a buyer agrees to pay overage on the grant of Planning Permission, they need to be sure that they will actually have the funds to pay overage in these circumstances, as without a sale of the land, the grant of planning permission will not itself generate any immediate additional monies.
It is common to see overage being payable on whichever is the earlier of (a) Planning Permission being implemented and (b) the land being disposed of (i.e. sold or let on a long lease) with the benefit of Planning Permission.
The transfer or overage deed will specify the period of time during which the overage provisions will apply to the land. This can be any period that the parties agree but it is common to see periods of up to 40 years. The provisions will usually apply to any future owner of the land during this time, who will usually be required to covenant directly with the original owner (who benefits from the overage provisions) before a sale can go ahead.
The amount of overage payable is usually specified as a percentage of the uplift in value of the land if a trigger event occurs (as above). The parties can agree any percentage – this will depend on the market conditions at the time but is commonly between 20 and 40%.
The transfer or overage deed will set out detailed provisions relating to the calculation of the overage amount. The amount will usually be determined by a surveyor, based on the provisions in the overage document.
The buyer may require certain costs to be deducted from the uplift in value of the land. For example, if overage is payable on implementation of a Planning Permission, the parties may agree that the building costs will be deducted from the uplift in value of the land before the overage percentage is applied. Or if the overage trigger is disposal of the land, the buyer might want to see the marketing costs deducted. Any such provisions must be stated in the overage document, and will usually be subject to lengthy negotiation as they could have a significant effect on the amount of overage that may or may not become payable.
These are just some of the issues to be considered in the context of overage. We would always recommend that both the seller and the buyer take advice from an independent surveyor before agreeing any heads of terms that include overage, and from an independent solicitor before signing any binding documents that include overage.
For further information please contact Victoria Sandberg.
Please note the contents of this blog are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.