Overage and trigger events - When can a seller take a second bite of the cherry?
In these articles, we will explain the basic concept of overage and the specific events commonly used as trigger points which cause an overage liability to be payable.
Part 1: What is overage and why is it important?
What is overage?
When dealing with a property transaction, you may come across the terms "overage", "claw back", "uplift" or "anti-embarrassment clause", which are all used interchangeably to describe the same principle.
Overage is a legal mechanism whereby a buyer of land agrees to pay the seller additional money at a later date on a certain event occurring. These specific events are often referred to as "trigger events" and are usually the type which results in the value of the property increasing significantly (e.g. grant of planning permission).
For sellers, overage can act as a second bite of the cherry after having sold the property. It is a chance to be paid further sums on top of the purchase price already received.
By way of example, if you sell a piece of land for £500,000 and the buyer later obtains planning permission to build houses on it, the value of the land may rise significantly. An overage agreement ensures that you, as the seller, receive a share of this increase in value.
Why is overage important?
Overage is a way for sellers to protect their financial interests. It ensures they can benefit from future developments or changes that increase the value of the land, even after they no longer own it. This can be particularly important if the initial sale price was based on the land's current use, rather than its potential future use.
For some sellers in certain circumstances, imposing an overage can also be a means of protecting their reputation. For example, if the seller is a developer itself but has been unsuccessful in obtaining planning permission for a parcel of land (or does not have the necessary funding at the time to explore and make such planning application), an overage agreement on the sale of the land would protect the developer from reputational embarrassment in the event its buyer is able to secure planning permission and increase the value of the property promptly after the sale. Similarly, if the land is owned by a public body and is ripe for development, the public body may face scrutiny if the property is sold without an overage agreement or any consideration of the potential development value of the site.
For buyers, any overage should be a consideration when purchasing land, as it may impact the overall profitability of their plans for the site and make a project unviable. Some buyers might even consider using overage as an incentive to landowners otherwise unwilling to sell or to reduce the value of the initial purchase price payable.
How does overage work?
An overage agreement is typically set out in a legal document which specifies:
- The trigger events that will activate the overage payment
- The amount, or formula, for calculating the payment
- The time period during which the overage applies (the "overage period")
- Any exclusions or limitations to the overage
- Protections for the seller and releases for the buyer.
The buyer is usually required to notify the seller when a trigger event occurs and pay the agreed sum. To ensure compliance, the seller may also register the overage agreement as a legal charge or restriction on the land title.
Part 2 will focus on common trigger events.
If you have any queries in respect of overage, need assistance in putting an overage agreement in place, or require advice about interpreting or enforcing an existing overage agreement, please do contact Mehraj Abdal Enus or another solicitor within the Property Development team here at VWV.