Overage Agreements - A Snapshot
Overage provisions are a useful tool when disposing of land with development potential but require careful consideration due to their highly complex nature.
So what are overage agreements and why are they used?
What Is Overage?
Overage, which is sometimes referred to as clawback or uplift, is a mechanism which allows a seller to benefit from an increase in the value of land after it has been sold. Overage provisions are included in a legal transfer deed or via a separate overage deed and operate by requiring the buyer to make a further payment to the seller to represent a proportion of the increase in value of the land.
When Should Overage Be Considered?
Overage is usually considered where the land being sold has development potential, for instance, where there is a reasonable expectation that a valuable planning permission may be granted in the future.
Positive and Negative Overage
Overage clauses are sometimes described as being either positive or negative in nature.
Positive overage involves the seller extracting an 'express promise' from the buyer to make a further payment if an agreed trigger event occurs in the future.
Negative overage clauses are where the seller imposes a restrictive mechanism on the land sold, such as a restrictive covenant, that prevents a change of use or particular development. In order to release the restriction on the land, the seller can require payment of an additional sum at a future date.
How Long Is the Overage Period?
The overage period typically ranges between 5 and 20 years and we recommend sellers consult with a land agent in order to determine the ideal length of the overage period for the transaction.
Ideally, the seller should consider an overage period that is not too short that a buyer could easily avoid its terms by waiting for it to lapse, however it should not be too long that it would be considered so onerous that a potential buyer would not consider purchasing the land. A middle ground needs to be reached.
What Is the Trigger Event?
The obligation to pay overage is normally crystallised upon occurrence of a trigger event within the overage period. Common triggers in the context of development include the grant of planning permission, implementation of planning permission or the sale of units on a development site. The seller would generally prefer an earlier trigger event whilst a buyer would prefer a later one.
How Is Payment Calculated?
Additionally, the seller will need to consider how they would like any overage payment to be calculated upon an agreed trigger event. This could be based on a fixed amount, a percentage of any increase in value or, in the case of a larger development, a seller may consider setting a payment per unit built. The seller will also need to be aware of any payment terms the buyer may wish to impose, such as a deduction for planning costs or building costs from any potential payment.