Landowners: What is overage?
The use of overage agreements is now widespread and it is easy to understand why. After all, who wouldn’t want to create the chance of some additional cash, long after their land or property is sold?
What is Overage?
Sometimes referred to as “clawback”, overage refers to a sum of money which may be due to a landowner following completion of the sale of land or property.
The emphasis here is on the fact that these monies may be due; as they will be dependent upon something occurring (for example – a planning permission being obtained, or a sales threshold being exceeded).
An overage payment should not be confused with a deferred payment; which is an unconditional contractual obligation on the buyer to pay the sums at a later date, once certain dates (or events) have occurred.
There are many different scenarios involving overage, but the common overage arrangements that we deal with are:
- A future planning permission is granted for development or change of use
- An additional/further planning permission is granted (or implemented)
- Sales proceeds of the Property (or individual plots) exceed an agreed threshold.
Advantages to a Landowner
An overage arrangement will
- Ensure that if a developer obtains a new planning consent (for more units or a greater square footage) then the landowner will share in any increase in the value of the land. This may also avoid a developer applying for a reduced consent initially (where the purchase price is based on market value), and then improving the consent once the purchase price has been calculated.
- Enable the landowner to share in the success of the development.
Disadvantages to a Landowner:
An overage arrangement can mean that:
- The initial purchase price is lower, because the Developer is unsure of the expected sales proceeds, so there is lower purchase price with an overage to enable the landowner to share in the sales for the completed units.
- The landowner may have to wait several years to receive any money, if at all.
Most importantly, there is no guarantee that the landowner will receive any money.
As overage is conditional upon something happening (which may not occur), so as a landowner you need to be comfortable with the actual purchase price (being paid on completion) because this is the only money that you are guaranteed to receive.
If you choose to sacrifice some of the purchase price in the hope of greater overage, you should be aware that you may not receive any overage if the events which trigger the overage do not occur (or occur outside of the agreed overage period).
Whilst the principles of an overage arrangement may seem simple, the actual drafting of an overage arrangement is much more complicated as it needs to ensure that multiple future situations are covered. This should safeguard the agreement so that it reflects the intentions of the parties, and ensures that monies are due, if the necessary circumstances have occurred.
There have been several cases involving overage where the drafting has been fundamental to whether or not overage has been due (and if so, how much). Therefore it is vital that you take advice on any overage agreement from a professional with experience in this area to ensure that your interests are fully protected and the developer is obliged to pay overage to you.
There are likely to be tax consequences for overage arrangements (where overage is paid), which is outside the scope of this article, but something which you should bear in mind and obtain specialist tax advice on.
The above is intended as a brief guide to overage, and should not be relied upon as specific legal advice, when agreeing terms, as there may be other matters to consider.
For specific legal advice on Overage Arrangements and any other development issues, contact Claire McSorley in our Real Estate team, or email your query to email@example.com; call us on 01276 686222 or visit our website https://www.herrington-carmichael.com/contact/.