A simple guide to Overage - what it is, how it's calculated, and what triggers the payment
What is overage?
Overage may also be known as claw-back or uplift and is an agreement that the Buyer of a property will pay extra, on top of the original purchase price, if and when a certain specified event or events happen.
The most common example is where planning permission may be granted on the land resulting in an increase in its value. Generally, in these cases the Seller will be entitled to a percentage of the uplift in the value. Depending on how the agreement has been drafted, this may be on the grant or implementation of a planning permission and may be on the first planning permission only or each and every planning permission granted within the ‘Overage Period’.
Other examples include:
- The grant of planning permission for a new (perhaps more valuable) use of the land
- The construction of more than a specified number of houses, or a larger than specified commercial development on the land
- The onward sale of the land in its present state – this may be where the Seller fears that the Buyer take advantage of a rapidly rising market and ‘flip’ the land for more money potentially causing embarrassment
- The proceeds of an onward sale of the property exceeding a trigger threshold, so if land is developed for housing and the sale proceeds exceed a specified sum either a percentage of that excess or a fixed sum may be due for payment to the previous owner of the land
A Seller may decide to impose overage provisions in order to achieve the best price for the property if it is likely to be worth more in the future particularly if there is development potential and similarly, Sellers will also use overage as a deterrent to developers if they do not wish to see the land developed by imposing onerous and often costly overage provisions.
How long are Overage Periods?
The duration of an overage clause normally depends on the nature of the event which will trigger the payment, and the likely timescale for this to occur. If the land is being sold to a developer who will immediately apply for planning permission, then a relatively short period of time may be negotiated – for example 5 years. But if the land that is being sold may not be suitable for development for some time, a much longer timescale is likely to be agreed. It is not usual to see overage periods of 15-20 years.
What will trigger the payment?
In most cases, the overage will be triggered by the grant of planning permission. However, there are additional details that may be drafted into the overage clause to be aware of:
- The trigger of payment of overage could be on outline or detailed planning permission. It could however be argued that it would be difficult to determine the value of the land with outline planning permission.
- The Seller may decide that overage will only be payable on the first planning permission or may decide that they want overage payable on each and every planning permission granted. This prevents the Buyer from submitting a planning application for one house for example, paying overage based on the uplift in the value of the land based on this and then go ahead and apply again but this time for 10 houses on the development significantly increasing the value with no further overage to pay.
- The overage could be triggered on implementation of a planning permission. The danger here for the Seller is what if the planning permission is never implemented? On the other hand, if overage is triggered on planning, it could be argued that the Buyer may not have the money to pay the overage sum until the land is developed and sold.
- Specific conditions can also be drafted into the clause/agreement, for example, that the overage will be triggered on the sale of the last house of the development. However, developers have been known not to sell the last house purely to avoid paying overage! However, this did not find favour with the Courts.
How much will the payment be, and how will it be calculated?
In most instances the Seller will state that they require a certain percentage of the uplift in value of the land to be paid to them i.e. 20%. A Seller must be careful not to be too greedy in respect of the uplift required as this could potentially put off future Buyers. Some may ask when the Buyer has gone to the time and expense of obtaining a planning permission, why the Seller should benefit 50% of the uplift if they have contributed nothing towards it? However, this does depend on what the Seller is hoping to achieve by imposing the overage.
Generally, the Overage Agreement or Clause will consist of details of the method to be used for calculating the overage due once triggered. This will include whether a valuer will need to be appointed, who should appoint them and who shall bear the costs.
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