Question: I am a commercial building owner and a developer wants to buy my property, but will only pay the current use value. The land will be worth four times as much when planning permission is granted. Would an overage clause be a good idea?
The most certain way of sharing in the potential planning windfall is to negotiate an increase in the sale price. If there is no room for movement on the price, an overage clause can help you share the uplift in value when planning permission is granted and the property is redeveloped. The danger in doing so is that your entitlement to a further payment is contingent and, because you will no longer own the land, it is essential that your entitlement is watertight.
Ensuring overage is enforceable is not straightforward, especially if the developer subsequently sells the land. A positive obligation to pay overage will not automatically be enforceable against your buyer's successor. A negative - or 'restrictive' - covenant can be enforced against successors, but only if it is genuinely negative in nature and you retain some land capable of benefiting from it. It is essential to have in place a structure that is enforceable, not just against the developer, but also against third parties.
Overage can be secured by a charge over the title, a restriction on the title, a requirement for a direct deed of covenant from successors, or obtaining a guarantee. A charge is the best form of security, but unlikely to be acceptable to a developer or its funder. A restriction is more likely to be acceptable, provided it does not hinder the developer from actually redeveloping the land.
There are several problem areas, such as the calculation of the overage amount or clarifying events that will trigger payment, so expert advice is essential.
Question: I am a housebuilder who has agreed to pay overage to the seller of the land I am buying. The seller requires a restriction against the title at the Land Registry. How do I stop this affecting plot sales?
Sellers often want to share in the gain when the value of the land they have sold subsequently increases, for example, when planning permission is granted. They may require an overage or profit share clause in the contract. As they will no longer own the land, they will want security to protect their entitlement to the overage payment.
One of the most common methods of securing overage is a restriction against the title. Land buyers, and their funders, often accept such a restriction. However, if the title restriction is wrongly worded, it can roll over into the subsequent titles of the flat or house buyers post development. This makes it hard for housebuilders, who will find it very difficult to achieve plot sales unless the restriction is reworded to prevent such a rollover.
There are ways to prevent the restriction rolling over into subsequent titles. It needs to exclude certain types of disposition such as plot sales and sales to housing associations, management companies and electricity substations. It should be worded to enable your solicitor to self-certify that the excluded dispositions will take effect free of the restriction.
In the past, different Land Registries have applied different policies as to whether they would accept self-certification or not. The Land Registry's policy has changed, making it much harder to self-certify.
It now requires evidence of compliance with the restriction and why it should not be carried forward to the plot buyer's title. Expert legal advice is essential at the outset when buying land for development. Failure to do so may leave you at the mercy of your seller when it comes to the subsequent plot sales.