Specialist Land and Property Lawyers 
A property overage agreement, also called a claw-back or uplift, requires a property buyer to pay an extra premium to the seller in the future if a particular event occurs – in addition to the original sale price. The event will be something that increases the value of the land, such as obtaining planning permission for development or building and selling a house.
These kind of agreements for an additional payment on property development value are already popular. They are normally found in transactions involving larger sites of land which are ripe for development. And it seems likely that they may become more popular still now that the UK government has set a highly ambitious target of 300,000 new homes a year.
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What is property overage?
If you want to sell land but believe it could be worth more in the future, an overage agreement allows you to protect your interest. As a seller, you can dispose of the property so that you have funds now but ensure that you will also benefit if the buyer manages to increase its value at some point by securing consent to build on it.
And if you’re looking to buy land for development, these kind of agreements can also work well for you. They allow potential developers to buy land or the property for its current value without needing to pay any additional premium at the outset for speculative future development.
The amount payable under a property overage agreement can be very substantial. It’s not unusual, for example to see payment due in this way of between 25-50% of the enhanced market value of land when planning permission has been granted.
What is the purpose of overage?
A property overage agreement is a good option if you do not want to obtain planning consent but don’t want to simply give away all of the potential development uplift in value resulting from planning permission being granted.
Applying for permission to build can be a lengthy and complicated process and is best tackled by planning experts. What’s more it can be expensive and the outcome is rarely certain. But an overage agreement allows you to have the best of both worlds. The developer can be left to make the planning application and you will avoid the expense, the stress of dealing with enquiries and the need to make alterations to the application.
If you are a potential purchaser, buying property subject to an overage agreement means you will not be paying over the odds for land when you may not obtain planning consent. If you are a developer, overage can help with cash flow as you will not have to pay the full value of the land until later.
The importance of specialist Property Overage Solicitors
Most conveyancing solicitors never deal with overage clauses – and that’s important because the highly specialist area, not least because of the often enormous sums potentially involved in successful overage deals.
It’s not surprising therefore that arguments about overages are 1 of the most heavily litigated areas of real estate law. And as you will see below, these agreements can be highly complex and getting them wrong can be catastrophic. That’s why you need solicitors who regularly deal with developers and these kind of property deals.
If you appoint the team here at Bonallack & Bishop, you can be assured that we have plenty of experience in acting for developers nationwide, and regularly deal with both the sale and purchase of land for development.
What is an overage agreement?
A property overage agreement is a legally enforceable contract between a land buyer and seller that effectively shares future profits when a trigger event occurs.
If you are considering entering into an overage agreement, it is essential to have it drafted to suit your needs and the circumstances of your transaction.
There are different types of overage agreements, with the three main ones as follows:
· Planning overage agreements
· Sales revenue overage agreements
· Sale at a profit overage agreements
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Planning overage agreements
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Overage agreements based on the granting of planning permission are a standard option. The contract must be carefully drafted to ensure that it is watertight. For example, if you are a developer, you do not want to pay the overage premium until you have planning permission that is implemented or that cannot be appealed.
If you had to pay as soon as planning permission is granted by the local authority but the decision is subsequently overturned, you could make a loss – paying an often sizeable sum by way of overage without getting the benefit of planning permission. . By waiting until you have used the planning consent, you can be sure that no-one can challenge it.
Planning overage can also be ongoing, known as rolling overage. This means that if the buyer sells the land on to another developer and the new buyer obtains planning permission that increases the value of the land, the new buyer will also need to pay the original seller. The new buyer can deduct any previous overage paid to the seller if the agreement allows this.
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Sales revenue overage agreements
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Another way of operating overage is to base payments on sales revenue. Developers often use this option for residential housing developments. As properties are completed and sold, the developer pays the original land owner.
Payments generally start once profits reach a specific figure. This type of agreement requires the developer to update the seller with sales figures as properties are developed and sold.
The developer will usually want certain allowances made in the agreement, including deductions for the cost of incentives given to buyers of the units and expenses relating to part-exchange deals.
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Sale at a profit overage agreements
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A third type of overage agreement aims to protect the original seller from the buyer flipping the land or selling it on soon after the purchase at a profit and without obtaining planning consent.
If the buyer is able to sell the land on at a profit, this type of overage agreement ensures that the original seller receives some or most of this.
How do property overage clauses work?
Overage clauses should be tailored to each situation so that buyers and sellers have the protection they need.
The agreement should be very clear about the trigger event, exactly how the parties must calculate the sum payable, and when payments will fall due. It can sometimes be useful to include sample calculations to show how to work out the premium.
The agreement must also list any costs that the developer can deduct. This could include the cost of applying for planning permission, the purchase price paid to the seller and other reasonable costs.
Any sales that will not attract an overage payment should be listed. Examples of transactions that often do not trigger overage are sales of affordable housing units and the sale or transfer of land to a local authority, statutory body, or management company.
Finding a fair agreement that balances both parties’ interests is key.
How long does an average overage clause last?
The agreement will state how long the overage provisions will last. Between 5 and 10 years is quite common, but the agreement can last for 25 years or more. However regardless of its length, when the overage period lapses, the developer will not have to pay overage even if they continue to develop the site.
Sellers therefore need to be careful when agreeing to overage provisions. If the period is too short and a development stalls, they can miss out on payments. One option to protect seller interests is to require overage payments in stages.
In specifying these stages, a seller may want to use steps in the planning application and development process rather than sales income, which can reduce the risk.
If you are a developer, when deciding how long you want the overage period to be, you will usually consider issues such as:
· What work you or the seller has already done towards the planning application and the time it is likely to take to apply
· How long it is currently taking the relevant local authority to process planning applications
· The complexity of the application and whether there is likely to be an initial rejection or request for alterations
· How quickly you believe you can complete the development
· The property market and how long it is likely to take to sell finished units
· The amount you will pay in overage; lower overage percentages can command a longer overage period, but if you agree to a substantial payment, you will usually be able to negotiate a shorter period for the overage clause
Can any property overage be removed?
Yes, if you complete overage payments, then any property overage is effectively removed. Otherwise, it may be possible to buy out an overage or agree on ending the obligations in some way. In this case, the seller should sign a deed of release confirming that the buyer is no longer required to make payments.
As a developer, there are several reasons why you may want to end overage in the future. If you want to mortgage or sell the property, it can be harder to do this while the land is subject to overage provisions. If you have the funds available to buy out the overage, then this can provide some certainty rather than having an unknown future debt to pay.
The existence of an overage clause can also make it harder to sell a property and you may prefer to remove it, where possible, before marketing.
The seller and buyer will need to enter into negotiations over the terms of the release. If the property has been sold on, you may need to investigate who the original seller was. A solicitor can help with this if you cannot trace the seller easily.
A guaranteed payment now may be more attractive to the seller than the possibility of an unspecified payment in the future, in which case they may be happy to agree to a deed of release.
Once overage provisions end, the property owner must remove them from the Land Registry title to the property.
How do you protect an overage contract?
You’re going to need an experienced commercial property solicitor to draft a comprehensive overage agreement containing the provisions necessary to safeguard both parties’ interests. In particular, the seller will want to ensure that their interests are protected.
Some pitfalls can arise if overage clauses are not watertight. These include:
· The developer obtaining planning consent for a small development and paying overage on this, then once the overage provisions have been satisfied applying for planning consent for a bigger and more profitable development
· The developer taking steps to avoid triggering overage, such as not making any attempt to sell the last property on the development
· The developer setting up a company and transferring the property to it at an undervalue to free the property of the overage clause
· The developer not making their best attempt at selling units while the overage agreement is in effect.
Can you get a mortgage on a property with an overage?
Most high street lenders are not prepared to lend against a property subject to overage clauses. This can be difficult if a seller believes that land included with a property has development potential and wants the right to collect a share of any future profits. It need not be a large piece of land; it could simply be that a property has a big garden that could potentially accommodate a new home.
Among the reasons why lenders are reluctant to lend money in the circumstances, include the fact that the property is likely to be more challenging to sell at a good price should they need to repossess and they may also have concerns over the buyer’s ability to pay overage liabilities alongside mortgage payments.
However, there are some lenders who are prepared to lend despite overage restrictions. The mortgage application process will, however, be more complex, and the lender will want to approve the terms and conditions. This can delay the mortgage approval time.
How is property overage calculated?
How parties calculate overage can vary widely. It is essential to have a clear formula included in the overage agreement along with worked examples to avoid any misunderstandings.
It will generally be based on the increase in value of the property once planning consent has been granted or the sale of the property or units at a profit.
The benefits need to be shared between the buyer and seller so the parties feel the agreement fairly protects their interests. If the calculation requires a valuation of the property, a method of valuing it should be set out in the original agreement along with details of how the parties will resolve disputes.
Overage agreements often allow the buyer to deduct certain costs from their profits before calculating the percentage to be paid.
What is the payment trigger date?
The trigger date is when the overage payment becomes due. Common trigger dates include:
· The date on which the local authority grants planning permission
· When the developer sells one or more properties
· When the developer implements the planning permission
· When the buyer sells the land at a higher value
An overage agreement can have staged payments, in which case there will be more than one triggering event.
Which disposals are permitted?
An overage agreement may allow some land disposals without overage becoming payable. These generally include the transfer of land needed for infrastructure or required by the local authority for roads, open spaces or community needs.
Can some property transactions be excluded from the overage?
It is common to exclude certain transactions from an overage agreement, such as granting easements, renting out land on a short lease or taking on a mortgage. The agreement should be clear on what disposals are permitted and whether the seller’s consent is required.
Can planning permission trigger the payment?
Planning permission is often used as a trigger event. However, a developer needs to ensure that they have consent that cannot be challenged before they are required to pay overage. Developers can avoid this by specifying that planning consent must be final or delaying payment until they implement planning consent.
Be warned – planning version can be overturned. And while under the Civil Procedure Rules, any judicial review claim to overturn an existing planning permission “must be filed not later than six weeks after the grounds to make the claim first arose”, the court retains the ability to extend time for filing an appeal in this way – and in exceptional cases that is what happened (the Thornton Holdings Ltd case in 2019 saw permission, originally granted in 2011 overturned!).
How is property overage secured?
Once an overage agreement has been signed, it should be registered against the property’s title at the Land Registry. This is to ensure that any future buyer is aware of the agreement before they complete their purchase. The original buyer must obtain the original seller’s consent to the sale. The original seller will give this once any due overage is paid and the new buyer has entered into a deed agreeing to comply with the overage agreement.
Other options for securing overage include:
· The seller retaining ransom strips that the buyer will need to complete the development and releasing them once the buyer makes the overage payments
· The seller taking a mortgage over the land
· A restriction preventing onward sale without the original seller’s consent. You can couple this with the requirement that a new buyer enters into a deed agreeing to comply with the overage agreement
Can overage clauses affect the buyer’s tax position?
Property overage clauses have tax implications for sellers and buyers. A buyer needs to take specialist legal advice on the Stamp Duty position. It may be possible to defer payment of Stamp Duty until you pay the overage. You should also take advice on the VAT and Income Tax position from a specialist property accountant. if you don’t have a sufficiently specialist accountant, our solicitors will be happy to introduce you to one.
Sellers need to be aware of Capital Gains Tax liabilities that may arise on the sale and the overage payments and understand they must pay these.
The tax position can be complex and speaking to a property overage expert is important to make sure that any potential liabilities are correctly handled.
Do property overage agreements make legal documentation more complicated?
Overage may complicate sales and purchases, but it is an established way of ensuring that both parties benefit from the potential of land for development.
Without overage, it can be difficult to reach a fair agreement and there is a risk that one party will lose out. The buyer may fail to secure planning consent and realise they have paid too much for land they cannot profit from along with the loss of time and money involved in applying for planning.
Alternatively, the seller may realise they have sold land at less than it is worth if the developer can obtain planning consent and increase the value of the land shortly after completion of the sale.
Should I buy land with overage?
Whether a purchase is right for you will depend on your circumstances and whether the overall deal is a good one. If you want to build on land that you are buying, a seller may know the value of the property they have and insist on a property overage agreement. Provided you understand the terms and potential drawbacks, buying land with overage can work well. As a buyer, you might otherwise have to pay a higher sum for land you might not build on.
However, you do need to be clear on the implications, including the effect on any onward sale if the original seller is not prepared to release you from the overage agreement. It may make it harder to mortgage or remortgage the property if you want to raise funds to finance a build or switch to a better mortgage deal.
You also need to ensure that cash flow will not be an issue. If the property overage agreement states that payment will become due when you receive planning consent, you must make sure that you will have this sum available. At this stage, you cannot profit from any sale, so the money will need to come from you or a lender.
If you do not intend to build on land, you can enter into an overage agreement knowing that the trigger event will not occur and you will not need to make any payments. You must still bear in mind that the agreement will impact borrowing and selling the property.
