From smaller parcels of garden land to larger parts of agricultural land, Overages (or ‘Clawbacks’ as they are more commonly known), can prove popular with sellers where such land may have development potential or otherwise achieve additional value at a later date.

An Overage can be included within a Land Registry Transfer document or can be drawn up as a separate Agreement.

Kimberley Fox, a Solicitor in our Property Department, discusses the use of Overage Agreements and key matters for consideration.

What is an Overage and what are the benefits of having one?

An Overage is a contractual agreement where the buyer agrees to pay the seller a further sum of money at some point in the future (and therefore on top of the purchase price) if a certain event, known as a ‘trigger’, occurs.

The ‘trigger’ event is a future event that enhances the value of the land, such as the grant of Planning Permission. This allows the seller to take a further ‘bite’ and benefit from the enhanced value after the sale has completed.

In most cases, the buyer is able to benefit from an initial lower purchase price subject to the condition that the buyer will make the additional payments should the trigger event occur.

Key Considerations

In negotiating the terms of the Overage, some of the main matters for consideration include the Overage Period (i.e how long the Overage will apply for, 5 years, 10 years, 20 years?); what events will trigger the Overage Payment; and how the Overage payment will be calculated.

In respect of the trigger events, the most typical include the grant or implementation of Planning Permission, the sale of any new properties that built on the land, or even the subsequent sale of the land (or part of it) at a higher value.

Both parties should pay particular attention to the conditions of the trigger event. An example would be where the buyer applies for Planning Permission for a 4-bedroom house but is only granted Planning Permission for a 2 bedroom house. Will this still trigger the Overage payment? Or is it only payable where Planning Permission is granted that is satisfactory to the buyer and contains no overly onerous planning conditions?

Buyers should also keep in mind the potential Stamp Duty Land Tax and Land Transaction Tax liabilities that attach to Overages. An estimate of the total consideration based upon the trigger event occurring should be undertaken and the tax calculated accordingly. Once the trigger event occurs, then usually a further return is required.

Once the Overage is agreed, there are various ways of protecting the seller’s interest but the most common is registering a restriction in favour of the seller against the land being sold. This prevents the land being sold without obtaining consent from the seller (i.e the beneficiary of the Overage).

Another way of protecting the sellers’ interest is securing the payment by way of a formal Legal Charge, much like a ‘normal’ Mortgage. Upon the occurrence of the trigger event, the Overage payment is secured and in the event the buyer does not make the necessary payment the seller could sell the land and take the payment out of the sale proceeds.

Buyers should be cautious where they are already using mortgage funding to purchase the land as some high street residential lenders do not accept Overages.

Conclusion

An Overage can prove beneficial to both seller and buyer, but like all agreements careful consideration should be given to the terms of the agreement and the future impact of the Overage.

For further information please contact a member of our Property Department who would be delighted to assist you with any queries.