‘Just give us a simple overage agreement’.

It’s strange how some phrases can haunt you over the years and the request to produce a simple, straightforward overage agreement crops up repeatedly.

Overage or ‘clawback’ is the mechanism by which a landowner sells land but is then able to realise part of the subsequent increase in value of the land, for example if planning permission is obtained some years in the future to develop it.

The fundamental issue with preparing an overage agreement is to predict how a series of different ‘what ifs’ are to be treated and the need to provide for different circumstances occurring over what could be a period of many years. The number of ‘what ifs’ to think about alone prevents the overage agreement from being short. Then the ‘what ifs’ may themselves pan out in different ways.

The majority of transactions are instant; the buyer pays the purchase price, the seller transfers title and there is no ongoing relationship. However with overage, the ongoing relationship between buyer and seller continues for the duration of the overage period which can in some circumstances be as long as 80 years.

What are the factors to be considered? This is by no means an exhaustive list but some of the key points include:-

What will trigger a payment? A planning permission may be the trigger but planning for what particular use – residential, industrial, office storage (the list of recognised planning uses will inevitably change during the overage period). Moving on, is the trigger to be outline or detailed planning? Also, what happens if the planning decision is challenged? Is the trigger just planning or is it the sale with the benefit of planning?

How long will the overage last? An 80 year period is one of the longest. A buyer will want as short an overage period as possible. Conversely, the seller will want as long as possible. Even in relation to a relatively short overage period of say 5 years, many factors including interest rates, demand for particular properties, and not forgetting legislation, can all change. But at this point in time we don’t know how.

How much is to be paid? A seller needs to be careful here. The essence of overage is to share in the hope value of a piece of land. The share that a seller seeks must not be so great as to deter the buyer from developing during the overage period. Is the payment a fixed sum, a percentage of the enhanced value of the site or a percentage of the amount a sale price exceeds a specified price? What formula is to be used in calculating the payment? How are the base value, the market value and the enhanced value to be calculated?

Who is going to have the benefit of the overage? At the extreme end of the range, with an 80 year overage period, the original buyer and seller will have retired and may well have passed away. Will their successors in title have the benefit of the overage?

How many times will the overage apply? In simple terms, how many ‘bites of the cherry’ can the seller have? Is the overage payment once and for all on the granting of planning permission or is it every time a trigger event occurs?

How is the overage to be protected? There are different structures with pros and cons to each. One size does not fit all but methods of protection include a legal charge, a deed of covenant and restriction on the title, a restrictive covenant or a bank bond and security deposit.

Overage is never simple. While a straightforward agreement can be drafted, the points to be considered and provided for mean it won’t be a short and it won’t be simple.

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John Guthrie

Senior Solicitor, Commercial Property

John started his career at Hart Brown in 2016. He is a Commercial Property solicitor with 18 years post qualification experience in property. He is...

Senior Solicitor, Commercial Property

John Guthrie

John started his career at Hart Brown in 2016. He is a Commercial Property solicitor with 18 years post qualification experience in property.

He is a member of the Law Society and has written articles for the local press in Kent and Sussex.

John's specialisms:

The full cycle of business leases, buying and selling businesses as a going concern, specialism in leasing and disposal of licensed premises, development work and residential leasehold extensions.

His most memorable case:

Handling the property aspects of a £20 million company acquisition and restructuring the leaseback arrangements to achieve a substantial SDLT saving.

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