What is it?
Overage, clawback and uplift are terms used interchangeably. They describe agreements made between a seller and purchaser of land or property and provide for the seller to receive a share in the uplift in value of the land if a certain future event occurs. The future event is often the grant of planning permission although it can be tailored to apply to any number of circumstances. This article will focus on overage being payable on the grant of planning permission.
When may it be appropriate to make use of overage?
With an ever growing population and shortage of good quality housing Local Authorities are having to change their planning strategies to cater for the demand. Consequently, land which you would never have dreamed would be developed is now being considered for housing.
It is therefore important for sellers to consider the likelihood of their land being developed in the foreseeable future. If there is a reasonable prospect that the land will be developed the seller may require the buyer to enter into an overage agreement.
The overage payment can be any amount agreed between the buyer and seller; it could be a fixed amount but is usually calculated as a percentage of the increase in the value of the land as a result of the grant of planning permission.
Arguably the most important aspect of the overage agreement to a seller is when they will receive a payment. The overage agreement will require the buyer to make a payment to the seller when a certain event occurs; this is known as the trigger event. The trigger event can be negotiated between the parties but examples of the most common triggers are: -
- Sale of the property with the benefit of planning permission
- Implementation of a planning permission
- Grant of planning permission for change of use or development
- The earlier of implementation of planning permission and sale of the property with the benefit of planning permission
The duration of the overage agreement can be any length of time as agreed by the seller and buyer. The seller will want the agreement to last for as long as possible to increase the prospects of planning permission being granted. On the other hand the buyer will want the agreement to come to an end as soon as possible so that planning permission can be obtained without the burden of making a payment to the seller.
What if the land is sold during the overage period?
To offer the best chance of return the seller will want the terms of the overage agreement to last for the duration of the overage period even if the land is sold to a third party.
The overage agreement creates a positive obligation on the buyer to make payment of a sum of money if planning permission is granted. The issue here is that positive obligations do not automatically burden the land and therefore any future purchaser would not be automatically bound to observe the terms of the overage agreement. This is unlikely to be acceptable to most sellers as the land could be sold after a short period of time to a third party who could freely obtain planning permission without the need to make an overage payment to the original seller.
To overcome this issue a well drafted overage agreement will include a requirement for the future purchaser to covenant with the original seller that they will observe the provisions of the agreement for the duration of the unexpired term.
A well drafted agreement will allow for a restriction to be placed on the buyer’s title to the land which requires the buyer to obtain the seller’s consent before any sale can proceed. Consent will only be given if there have not been any breaches of the agreement by the current owner and if the new purchaser covenants to observe its provisions following completion.
Why do you need appropriate legal advice?
Poor drafting of the agreement could result in ambiguity and risk the seller losing an overage payment.
It is important that the provisions of the overage agreement are drafted with care, are appropriate to the transaction and accurately reflect the terms that the seller and buyer have agreed. The trigger for payment needs to be clear and the calculation for determining the overage payment needs to be correct.
The Commercial Property team at Mayo Wynne Baxter have the experience and expertise needed, whether acting for buyer or seller, to ensure that the overage agreement is prepared correctly and that you understand how the agreement operates. If you would like assistance with an overage agreement or any other commercial property matter please do not hesitate to contact a member of our team.