To learn the facts about overage negotiations, which are increasingly forming part of land sale deals, read on!
This article explains:
- What overage means
- When overage is created
- How overage is calculated
- Overage conditions
- Negotiating terms
- What is allowed development
- Things to be aware of
What is overage?
Overage, also known as claw-back, is a negotiated agreement by which on a sale of land, the seller agrees with the buyer that if planning consent is granted on that land, the seller will be able to share in the potential increase in value of the land that he has sold.
In recent years overage agreements have become increasingly common when selling land. Although a seller may wish to negotiate and impose an overage clause on sale, whether this is achieved in the transaction may depend upon the negotiating strength of the parties and the likelihood of the overage trigger event.
The impact of overage is in effect the requirement for a buyer to pay an additional sum when a certain future event occurs. The seller of land by comparison is not only wishing to achieve the market sale price for the property at the time of disposal, but also wants to ensure that he will be able to share in any extra value that might attribute to the land at a later date within the overage period.
When is overage created?
The terms negotiated between the buyer and the seller will be recorded in writing and included within the deed which will transfer the property to the buyer on completion of purchase. The seller will naturally wish to protect the potential of obtaining an uplift in value and the arrangements at the Land Registry will require any subsequent buyer to enter into a deed of covenant to observe the overage conditions. Accordingly, future buyers of the property in succession will be liable to pay to the seller the uplift in value which had originally been negotiated on the relevant conditions being fulfilled.
How are overage payments calculated?
The basis of calculation relies on a valuation of the land before any trigger event giving rise to the uplift has occurred, compared with the value of the same land with the benefit of planning permission triggering such overage. Market value is the relevant assessment in either case. The overage will be a percentage of the difference in value between the purchase price or base value, without planning permission, and the open market value with new planning permission.
As mentioned, the registration of an overage arrangement at the Land Registry will disclose the specific terms relating to this but usually, the following are applicable:
1. The overage would be triggered on the granting of a planning permission which will be defined in the agreement and which most likely will refer to the residential development of the property. Development is defined in s.55 of the Town and Country Planning Act 1990, and this will give clarification as to when particular works may or may not be regarded as development.
2. The trigger giving rise to the obligation on the part of the owner of the land to pay a former owner the overage, is likely to be the grant of a planning permission for development but occasionally may be the implementation of such a consent.
An overage agreement may be capable of being triggered on more than one occasion and this would especially arise if land which was subject to overage was developed over a period of time in parts. The certainty of the triggering events is paramount as this is the basis on which the recipient of the overage will be entitled to ensure that he receives the payment from the landowner.
3. The overage clause is likely to include a potential extension of the overage period (the term for which the overage was to run), should the landowner make a late application towards the end of the term that the relevant planning authority cannot determine within the term.
The planning process would therefore be allowed to run its course and it is the issue of the final planning permission which would trigger the overage payment, notwithstanding the final consent being granted outside of the term of the original overage period. The landowner may therefore be frustrated from trying to avoid paying overage by making a late application in respect of the land which would trigger overage.
The original negotiating parties will have agreed the terms for the overage; subsequent owners of land that is subject to an overage clause will be bound by such terms. The terms of the overage may reflect the strength of the respective parties to the original agreement.
Much will depend upon the seller’s view as to the likelihood of the property increasing in value with the grant of planning permission. A buyer may accept stringent overage terms if he is unconcerned about the possibility of any future development. Future buyers from the original purchaser might even be able to ameliorate more stringent terms by negotiating a release of the overage provisions from the original seller in certain circumstances, which would still secure an additional payment to him beyond the price negotiated on the initial disposal of the land.
In the original negotiations, the following may be relevant:
- The likelihood of any planning permission being granted considering the potential future uses of the land and the geographical area involved.
- The term of the original overage period; typically, agreements are for a period of between 20-25 years.
- The percentage of the uplift in value of the overage agreement; whilst a fixed percentage is often stated, a sliding scale approach could be considered, reducing the percentage payable over the life of the term.
- The extent of the land to be subject to overage. If a large area of land was the subject of the sale and purchase between the original parties, it may only be part of such property that will be the subject of an overage clause.
- The allowable cost deductions in relation to the landowner obtaining the planning permission. The calculation of overage is usually based on the net uplift in value, so that potentially expensive planning costs being incurred by the owner will be allowed for.
- To avoid issues as to any minor alterations of the land subject to the overage, some disposals would be permitted such as the grant of easements to statutory undertakers, or road widening schemes. The extent of these may be determined by the current and potential future uses of the land in question.
- The requirements for any successors to the original buyer to enter a covenant to observe the overage terms and to be responsible for the professional costs arising in connection with the same.
What is allowed development?
In addition to the above, the original purchaser of the land may have intentions to use or develop the land in a particular way for his own purposes. Any such change of use may require planning permission from the local authority and it is relevant that the buyer is not caught by an overage provision in such circumstances. It will therefore have been agreed between the parties that the specific uses mentioned by the original buyer will be allowed for. Often the buyer will wish to have as much flexibility as possible and will negotiate accordingly; the seller will need to be mindful of such allowed development since he will not receive any overage payment if the land is so used.
On the grant of planning permission, the seller should also take care to ensure the extent of the land which is the subject of such allowable development and whether any subsequent permissions (after the allowed development has occurred) should be subject to the overage or whether this should only be allowed development for the original transferee (buyer) and not his successors in title.
Because the successors in title to the original buyer will be bound by the overage terms, the buyer may wish to resist too onerous terms that a seller might try to impose. When the buyer in his turn comes to sell the land, stringent terms effectively limiting the scope of what may or may not trigger overage could potentially be off-putting to subsequent buyers.
By contrast, the original seller may wish to be reasonable in the overage terms to potentially encourage the buyer or future buyers to make a planning application which the original seller is unwilling or unable to make, since it is in the seller’s interests to receive any overage payment within the term. The benefit of the overage receipt can be passed to the seller’s personal representatives in the event of his death and may potentially profit his beneficiaries.
Things to be aware of
Finally, the more frequent occurrence of overage agreements needs to be carefully considered and specific advice sought. The enforceability of such agreements may be relevant and if drafted in uncertain terms or for a period in excess of statutory requirements, they may not succeed. Also, an overage agreement may have a bearing on a lender’s willingness to lend against the land or property and could potentially cause delays on future sales.
Are you seeking planning permission?
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