Overage Triggers - How to Get Them Right
Overage is a mechanism which allows a seller to benefit from an increase in the value of land after it has been sold. It is particularly useful where the land has development potential.
The buyer will make a further payment to the seller to represent a proportion of the increase in value upon the occurrence of an agreed trigger event.
Though there are many factors to consider when negotiating overage, trigger events can be a point of contention, both during the negotiation stage and after. Ultimately, the agreed trigger event or events will be for the parties to decide, however common triggers include:
- Grant of planning permission.
- Implementation of planning permission.
- Sale/disposal of individual units on a larger development site.
Grant of Planning Permission
The seller would normally prefer the trigger to be the grant of planning permission as this would increase the likelihood of the trigger date being within the agreed overage period. A buyer, on the other hand, will generally prefer the trigger to occur later in the development process where the value in the land is a little more realised.
A prudent buyer may also want to consider incorporating provisions such that the planning permission is 'unchallengeable'. In that case, the trigger would be the grant of a planning permission which remains in place following the relevant period for judicial review.
Implementation of Planning Permission
If implementation of a planning permission is the agreed trigger, then the parties should be careful about the possibility that a planning permission cannot be implemented. In the 2018 case of London & Ilford Ltd v Sovereign Property Holdings Ltd, a buyer had planning consent to construct 60 flats, however not all 60 flats could be constructed as this would contravene building regulations. The Court of Appeal considered that planning and building regulations were two separate regimes; the parties had agreed the trigger by reference to the grant of planning permission, making no provision for the requirement of building regulations approval. The buyer was therefore required to pay the overage as the trigger was the grant of the planning consent but this case clearly has implications where the trigger is implementation.
Disposal of Units
The parties should carefully consider what constitutes a disposal. A wide definition of 'disposal' would be preferable to the seller to prevent the buyer from exploiting any loopholes. On the contrary, the buyer will want to be able to deal with the land in certain situations without triggering overage payments, for example charging it to a lender to fund the development.
In addition, parties should be wary that if a trigger is the disposal of the land, does this cover a situation where the land is owned by a company and it is the company that is sold? If not, as the land still remains within the ownership of the company, the buyer could simply sell the shares in the company to avoid paying overage.
How To Get it Right
Overage can be extremely complicated. Disputes often arise where the terms of an overage agreement are unclear and where possible eventualities have not been considered by the parties at the time of negotiation. Parties should mitigate these risks by seeking specialist advice and giving careful consideration to how the overage mechanism will work from start to finish.