An overage, also known as a claw-back, is a type of arrangement quite commonly used in property transactions. Overage clauses are often sought by sellers to obtain an additional payment post sale on the happening of a certain event (usually on issue or implementation of planning permission for development).
The typical use of overage is where the selling owner knows that in certain circumstances, the open market value of the land may become considerably higher. The seller may want to recover some of that future promise, which they do by agreeing an overage.
Typical considerations and clauses in Overage Agreements
When agreeing an overage, the principle terms to consider often include:
- Trigger event – What will trigger a payment of the overage? It may be on obtaining planning permission, implementing planning permission, sale at a higher price, change of use or release of a covenant regarding development.There can be more than one trigger event during the life of the overage so as to trigger multiple payments.
- Payment – The payment required needs to be considered. It can either be a fixed sum or an amount determined by a calculation (e.g. a percentage of any uplift in value).
- Period – How long should an overage last for? A five year overage is not unusual, although it can be for much longer or shorter.
- Method of protection – An overage can be positive (e.g. requiring a promise from the buyer to pay), negative (restricting development unless payment is made) or a mixture of both. It can be protected under a contract, a charge, restriction on the title or by retaining a ransom strip. The best method depends on the circumstances and whether debt finance is required by the buyer.
Whilst claw-backs can be attractive, they are complex and not always appropriate (i.e. chances of re-development are unlikely). They are often litigated over and so it is important to get an experienced professional to deal with them.
Typical pitfalls with Overage Agreements
These can include:
- Not properly protecting the overage to ensure payment is received;
- Not defining terms correctly (e.g. payable on outline planning instead or outline and/or full planning permission);
- Adopting an incorrect formula for calculation for payment.
If you are looking to structure the sale of development land, or seeking to negotiate a purchase with overage provisions, please get in touch. Our team at Axiom DWFM would be delighted to assist.