What Do I Need to Know About Overage?
Overage (also known as an uplift or anti-embarrassment clause) is a mechanism used in an increasing number of property transactions to protect the...
... seller's position in the event of the buyer achieving an uplift in the value of the land in the future as a result (usually) of obtaining planning permission for development or enhancing the original intended development scheme.
An overage provision can be a very useful tool when disposing of land with development potential. However, as the recent case of Sparks v Biden [2017] EWHC 1994 (Ch) demonstrates, overage clauses do not always work as both parties might have expected. These issues can be avoided if the seller and the buyer properly ensure that the clause reflects their commercial aims. In particular, both parties should consider the following factors:
What Will 'Trigger' the Additional Payment?
It is important to have discussed when the additional payment will become payable. Typically, the seller will want the additional payment to be triggered at the earliest stage possible (eg on the grant or implementation of planning permission that increases the value of the land) whilst the buyer will want to ensure that an uplift is actually realised before making any additional payment. This could be achieved by tying the trigger to receipt of the sale proceeds for the developed land. The obvious risk for the seller here is that the sale may not complete during the overage period, even if planning permission has been granted and the value of the land increased.
The 'trigger' point in the case of Sparks v Biden [2017] EWHC 1994 (Ch) was the sale of the completed homes. The buyer took steps to avoid the sale of these by living in them himself and letting the others out on assured shorthold tenancies, therefore avoiding any further payment becoming due under the overage. The Court implied a term requiring the buyer to use reasonable endeavours to achieve the sale of the homes but did not act to change the trigger point that had been agreed between the parties.
How Long Should the Overage Last?
The 'overage period' is the time period following completion during which the overage will bind the land. Typically, the overage period should be linked to a realistic estimate of how long it will take for additional proceeds to be realised. Some overage periods are as short as three to five years whilst overage periods over bare land yet to be allocated for development purposes could be for periods of 30 years or more.
How Will the Additional Payment Be Calculated?
The parties will need to consider how the payment is to be calculated. Will the additional payment be based on a fixed figure for each additional unit or an agreed rate based on additional square footage or a percentage of the uplift in the value of the land or the sale proceeds? The parties need to agree whether the payment will be a one-off payment or whether the overage can be triggered multiple times during the overage period. Multiple triggers can be onerous and can cause issues for funders and subsequent purchasers. In all cases, worked examples should be considered and included within the draft documentation to prevent disputes in the future.
How Will the Additional Payment Be Secured?
The most common ways to secure the overage is by way of a charge or by way of a positive covenant and a restriction on the legal title to the land. Other ways to secure the overage include a bond or guarantee being given, a ransom strip being taken or restrictive covenants being placed over the land being sold. The most effective way to protect the payment should be considered on a case by case basis and may involve a combination of different measures.
Given the points above, it is important that overage provisions are carefully drafted and that the commercial points have been discussed in detail between the parties. Both buyers and sellers should seek advice at an early stage to ensure that their interests are properly protected.