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When deciding to sell a property or a piece of land, there are circumstances where you may want to consider selling property subject to Overage provisions.
What is Overage?
Overage gives you, as a seller, a second bite of the cherry. As well as receiving the sale proceeds, overage allows you to share in any increase in value in a property that is realised after the property has been sold.
Overage provisions on land or property can also be referred to as clawback or uplift clauses.
If certain circumstances occur (at some stage after completion of the sale) the buyer makes an additional payment(s) to the seller for the same piece of land.
When should I think about overage?
Overage obligations allow you to sell at the current market value of the property, without having to forgo a share in the development potential of the property when that is actually realised.
If you are selling a piece of land or property and you think there is a reasonable expectation that the land may be redeveloped or that a valuable planning permission may be granted in the future, we would suggest that you think about overage. That way, you have a mechanism for getting a share of the uplift in value after completion of the sale.
How do Overage payments work?
There are five main elements of an overage clause:
- What will trigger the payment?
- How much will the payment be, and how will it be calculated?
- Will making a payment release the obligation?
- How will the payment be secured?
How long does Overage last?
In short, the overage agreement will apply for whatever number of years the seller and buyer agree at the outset. There is no minimum period but often the parties will agree a set time period such as ten or twenty years.
The length of time will often depend on the nature of the event which will trigger the payment, and the likely timescale for this to occur.
If the land is being sold to a developer who will immediately apply for planning permission, then a relatively short period of time may be agreed - perhaps 5 years. However, if the land that is being sold may not be available for development for 20 years, a much longer timescale is likely to be agreed.
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.
When will Overage payments be triggered?
There is no set rule here. Overage payments are not standard and different arrangements will apply to each transaction depending on what the buyer and seller agree.
Some examples of circumstances which might trigger an overage payment are:
- If planning permission is granted for:
- - a change of use; or
- - the construction of another property within the land owned; or
- - demolition and re-building of a more intensive development.
- If the property is sold with benefit of a planning permission but the seller envisages that the buyer may obtain a more favourable or intensive planning permission in the future.
How much Overage will the buyer have to pay?
The overage agreement will specify what is payable. Sometimes it is a set amount or there could be a formula to calculate the amount payable. Or you could say a percentage of profit is paid. Sometimes the amount is linked to an index such as the retail prices index.
Will making a payment release the obligation?
In short, this depends on the clause. Sometimes, a one-off payment will be triggered if a certain set of circumstances are met.
In other cases, the overage sum will be payable each time a certain event happens, i.e. each time a planning permission is granted or each time a property on the development is sold. You need to be clear about what you are agreeing and what is drafted into the paperwork.
How will Overage payments be secured?
There are a number of ways to secure your overage agreement, including by way of a contract, a guarantee, a charge or a covenant on the title.
The most usual method is to register a restriction on the title to the property and a requirement that upon any future sale, any new owner will enter into a deed with the seller confirming they will comply with the terms of the overage agreement.
Questions about Overage provisions
Hopefully you have found this guide useful. Overage can be a tricky issue to deal with as a buyer or a seller.
At Frettens, we have one of the largest and most experienced Commercial Property teams in the area, and we are recommended in the Legal 500, an independent Legal Services directory.
Our Commercial Property teams are happy to discuss any issues that this raises for you and we offer a free initial meeting or chat on the phone to all new clients.
If you have any questions, you only have to ask us at Frettens. Please call 01202 499255 or 01425 610100 and Ben or a member of the team will be happy to chat about your situation and your particular requirements.