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Overage Agreements: Pros, cons, tax implications and more

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Overage Agreements: Pros, cons, tax implications and more

Whether you’re selling land in an uncertain property market or to a developer, having an overage agreement in place is a great way to ensure additional payment if the value of your property increases.

But how exactly do they work? What are the risks? And what are the tax implications?

Commercial Property Partner Sarah Heath answers those questions and more in this article.

What is an overage on property?

Overage is a contract that requires the buyer of a property to pay the seller additional funds after the sale is complete. It is most commonly used where a property has increased in value since it was sold.

For example, a property may have been sold for £500,000 and the buyer subsequently obtains planning permission that significantly increases its value. Overage provisions ensure the seller has the right to a further payment in such circumstances.

It is a great mechanism for getting a share of any uplift in value after completion of the sale.

Related: A checklist to get your commercial property ready for sale

What triggers an overage clause?

An overage clause may be triggered by:

  • Planning permission being granted
    • For a change of use,
    • The construction of another property, or
    • The demolition and re-building of a more intensive development
  • Redevelopment taking place
  • The sale of a completed development

Overage can also be agreed beforehand without any of the above triggers, perhaps due to expected changes in the property market, if both buyer and seller agree.

Related: How to sell land to a developer

What is a typical overage percentage?

Typically, an overage agreement sets out a set payment of 25-50% of the additional market value of the property. So, if the property increases in value by £50,000, overage could be £12,500 - £25,000.

Alternatively, an overage agreement could specify a set amount or provide a formula to calculate the amount payable; perhaps based on the property’s value according to a price index.

How much does an overage agreement cost?

In short, it depends. You may incur valuation, surveying, negotiation, administration and legal fees as part of drawing up an overage agreement.

Its best to get a quote from all the relevant parties to ascertain how much an overage agreement is likely to cost before proceeding, especially if the perceived increase in property value is relatively low.

At Frettens, we would be happy to provide a tailored quote for our legal fees in drafting and negotiating an overage agreement. We aim to price our services fairly. You can get speak to a member of the team and get a quote by calling 01202 499255 or by filling out the form at the top of this page.

How long can an overage last?

Again, this depends on what is set out in the overage agreement!

If, for example, the land is being sold to a developer who will immediately apply for planning permission, then you might agree on a relatively short period of time – such as 5 years.

However, if the land isn’t available for development for another 20 years you’ll probably agree a longer timescale.

The overage is often registered at the Land Registry and will attach to the land if it is sold on. This means future buyers are likely to be caught by the overage as well.

Can an overage be triggered more than once?

Yes, if specified in the overage agreement, there may be multiple events that can trigger more than one overage payment being made.

For example, overage may be payable if planning permission is approved for a change of use, and once again if, say a year later, redevelopment takes place.

Can an overage be removed?

It is possible to remove an overage obligation. This might happen naturally after a payment is paid, if its set out in the agreement as such.

Alternatively, you can enter into a Deed of Release to remove overage.

Related: How to deal with a Restrictive Covenant on a Property

How are overage payments taxed?

Depending on your circumstances, and whether the property is residential or commercial, the following tax may apply:

  • Capital Gains Tax (CGT)
  • Income Tax
  • Corporation Tax

For tailored advice on your tax obligations, please contact our team on 01202 499255 or by filling out the form at the top of this page.

Related: Selling your house – what documents do you need?

Do you pay stamp duty on overage?

If overage is considered part of the property transaction, then Stamp Duty Land Tax (SDLT) will likely apply.  This is payable by the buyer.

Furthermore, the buyer may have to submit an additional return to HMRC for SDLT payable on any overage payment.

Find out how SDLT is calculated, the exemptions and how much will be applicable in our dedicated article here.

Should I buy a property with an overage?

It depends!  What needs to be established is:

  • What triggers a potential payment
  • How the payment is calculated
  • When it is payable

Overage agreements are legally technical documents and require careful drafting.  I have seen overage provisions that are simply not enforceable. I have also drafted overage agreements under which sellers have received significant overage payments.

Sellers and buyers should not be scared by the concept of overage.  It is a very useful commercial tool that allows both parties to share in the increase in value of a property in certain agreed circumstances.   The seller of a property knows that they have not lost any potential sale value and the buyer can agree a commercially fair arrangement under which they:

  •  pay a fair price for a property at the point they acquire it; and
  • a further payment to the seller if they increase the value of the property

Don’t forget that if overage is payable it means that both the seller and buyer will have financially benefited from the arrangement.  It can be a ‘win win’ situation!

Overage Solicitors

If you have any questions following this article, please don’t hesitate to get in touch with our bright Commercial Property Team.

We would be happy to provide you with advice tailored to your circumstances and draft a overage agreement for you.

Call us on 01202 499255, or fill out the form at the top of this page, for a free initial appointment.

Related: Buying Commercial Property: Everything you need to know before taking the plunge

The content of this article, blog or video is not intended as specific legal advice. For tailored assistance, please contact a member of our team.