Why it’s Important Not to Overlook an Overage Clause
We have recently advised a property developer on the purchase of land involving an overage clause, or “clawback” provision.
Our client was concerned that pre-commencement conditions in any planning permission he obtained may scupper his plans to build and he would be out of pocket. He had bought two plots of land, one with planning permission and one without. The seller wanted an overage agreement on the second plot to be paid once planning permission was granted.
However, if this was the case and then the land was revealed on a search to be contaminated this would affect both its value and our client’s ability to proceed with the proposed build meaning he could be left with a plot worth much less than it would otherwise be.
What is an Overage Clause?
Overage is something that can be used to help landowners maximise value when selling land which has the potential to be developed as it protects the seller’s right to a share in the future value of the land or property.
“Overage is an agreement whereby when an event in the future occurs – usually in these situations obtaining planning permission – it triggers the payment of a further sum from the buyer to the seller. They can then cash in on any increase in value in the land once the planning is obtained,” said Ben Tatters, Commercial Property Lawyer at Pearson Solicitors in Oldham.
How does an overage agreement work?
It is a contractual agreement, but colloquially it is sometimes referred to as claw-back or uplift. Basically an overage is an agreement, in addition to the purchase price, that the buyer will pay more when and if the land value increase following an agreed future event or trigger – for example in the case of planning permission being granted on the land.
The trigger event for calculating overage payments is often the granting of planning permission.
Whilst this is beneficial to a seller, it is not necessarily so for a buyer as simply obtaining planning permission is not the end of the story. The planning permission will contain conditions which the developer needs to comply with in order to be able to develop the land.
Some of the conditions will be pre-commencement conditions, which set out what is needed from the developer before work can start on the land. Usually this is in the form of obtaining satisfactory environmental and ecological surveys and assessments, but is not limited to this.
If a problem is revealed in this part of the process the development may not be able to proceed, or not as intended. A developer does not want to trigger the overage and be contractually liable to make a payment only to find out they cannot actually build their development.
When are overage clauses used?
Overage provisions are used when land is sold that is likely to increase in value in the near future if its circumstances change. This normally means when planning permission to develop it is granted. The amount to be paid under the overage provision can be a fixed amount or calculated by reference to a formula or ascertained by the market value at the time of the triggering event. These details will be managed by your solicitor and will form part of the contract. Appropriate time limits for the triggering events will be put in place as part of the contractual agreement.
“In this case I advised my client in relation to the structuring of the overage agreement. We discussed the trigger for the payment and he advised he was concerned about having to pay out a substantial fixed sum that had been agreed with the seller on the basis of just obtaining planning. He knew that there were pre-commencement conditions to be satisfied before he could actually start building.
We therefore structured the agreement to state, in effect, that he’d only have to pay the money once all of the pre-commencement conditions were satisfied (assuming he obtained planning permission) so that he knew he could build the house and so it would recover the extra monies in due course,” said Ben Tatters.
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Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers Ltd or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.