Overage and trigger events - When can a seller take a second bite of the cherry?

Part 2: Common trigger events

Trigger events can vary depending on the agreement but typically include the following:

• Grant of planning permission

One of the most common overage triggers is the granting of planning permission for development on the land. For example, if planning permission is obtained to build houses, a shopping centre, or industrial units, this may significantly increase the land's value. The overage agreement ensures the seller benefits from this uplift.

Whilst this trigger event is ideal for a seller as the payment is due whether or not the value of the land is realised, a buyer might want to consider the following:

1. Will it have the appropriate cash on the grant of the planning permission to be able to make such payment or should the trigger event instead be combined with the disposal of land with the benefit of planning permission so that there is cash coming in for the buyer to be able to make the overage payment (see below).
2. The value of the land has not been realised and the buyer may be making an overage payment based on a valuation for which the property is not in fact later achieved.
3. The overage to be payable after the period for judicial review has passed in respect of the planning permission granted. Otherwise, an overage payment may be calculated on the value of the land on the grant of the planning permission which may have subsequently decreased after a successful application by a third party opposing the grant of such planning permission.

If agreed as a trigger event, the seller should make sure that the overage does not fall away on the grant of the first planning permission but also captures any subsequent planning permissions during the overage period which result in any further uplifts in the value of the land. 

• Implementation of planning

Some agreements specify that the overage payment is triggered on implementation of a planning permission granted. 

This trigger event affords the buyer an opportunity to:

1. Account for the overage liability in their assessment of whether or not the planning permission granted is indeed a viable project
2. Raise the appropriate funds before the overage becomes payable.

Where however the buyer decides not to implement the planning permission itself and instead sells the property onwards for a significant profit (with the land now having the benefit of planning permission), the seller could end up missing out on the realised uplift in value where only the implementation of planning permission is a trigger event. Further, the second buyer may choose not to implement the planning permission granted at all, or later find that the planning permission granted is not in fact possible to implement (e.g. building regulations might be contravened).

Seller's should be wary where a buyer may instead suggest that such overage payment be made once the development is completed so that the buyer has realised the value of the development. This poses a significant risk to the seller should:

1. The development never be completed (e.g. due to a lack of funds or the buyer deliberately leaving a small immaterial part of the development incomplete so as to circumvent any overage payable whatsoever).
2. The development be carried out to substandard which consequently reduces the value which the project would have otherwise achieved if carried out properly. 

• Disposal of the land

A trigger event may be activated if the buyer makes a disposal of the land. 

This trigger event makes it easier for the buyer to be able to pay the overage liability as the buyer can use the funds received from the disposal it made. Careful consideration however needs to be given to what amounts to a "disposal" so as to prevent:

1. The buyer having to make an overage payment because the definition of "disposal" in the agreement is too wide (e.g. includes the grant of a wayleave agreement).
2. The seller missing out on a disposal because the definition of "disposal" is too narrow (e.g. does not capture long leases or, where it is a company or an SPV which only has the benefit of this property, the buyer company entity is sold causing the trigger event to be circumvented and no overage being payable).

Often, we see a combination of the various overage trigger events which ultimately seek to achieve a balance between the seller's overage not being circumvented and the buyer's ability to make such payment based on a realised uplift in value.

What should you do?

Overage is an extremely complicated topic and this article is only a quick whistle stop tour of some of the issues which might be faced with trigger events, being one of many elements to an overage agreement. Overage agreements are often contentious documents and need to be drafted with careful consideration. 

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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.