A clawback agreement is an agreement made between a seller and a purchaser of land and/or buildings. It provides for the seller to receive an additional payment, or otherwise share in the uplift in value of the property if a certain future event occurs.
Clawback agreements are often used in a rural property context if land is being sold for one use and priced accordingly – but it is considered reasonably likely that the land use may be changed in future. The classic example is additional garden ground, which has the potential to become a plot for a new house.
Clawbacks are also often encountered where there is potential for a renewable development on the land, but different considerations apply to such situations and those will not be considered further in this article.
Clawbacks can, however, complicate transactions (and increase costs) - particularly if clear terms have not been agreed by both parties at the outset. Key points to consider are:
1. What is the “trigger” event that will require the additional payment be made to the seller?
The granting of planning permission, or the future sale of the property, for a different purpose are common triggers of clawback payments.
It is possible for planning approval for development itself to trigger the requirement to make a payment. That is probably the simplest option, as it is clear when the trigger event has taken place – but it may be problematic from a cashflow perspective for the purchaser.
Other options may be to make the trigger the commencement (or completion) of construction, some stated period following either of those, or the point of sale following the granting of planning permission. The latter is likely to be a purchaser's preferred option, as they will be in receipt of funds which they can use to make the clawback payment.
2. What sort of development will the clawback apply to?
It is possible to suggest wording in the agreement to cover any development (i.e. anything that involves works of construction, alteration or change of use to the property), though it is more common for clawbacks to be limited to specific types of development (e.g. residential).
Parties may also wish to exclude specific actions (e.g. the building of a garden shed, agricultural building or green house might be permitted without triggering the clawback). It would be unusual for the clawback to cover something that would not require planning permission.
3. How is the payment calculated?
If the clawback payment is calculated on anything other than a sale value (i.e. the value of the property when it has been developed and sold) then the agreement will need to contain valuation provisions or mechanisms.
A common format would be for the payment to be calculated on the difference in value between the property with the benefit of planning permission for development and the value of the property without such a consent.
It would be reasonable for the purchaser to seek to deduct costs incurred in obtaining the consent which triggers the clawback payment before calculation of the clawback sum.
The percentage of the uplift (i.e. the percentage of the difference in values mentioned above, which should be paid to the seller) also needs to be agreed.
The period over which an agreement will subsist will depend upon what might be in contemplation and generally on the parties' respective bargaining positions. Arrangements extending to 10 or 15 years from the date they are entered are common, but up to 20 years is not unheard of.
5. Expert Determination
The agreement should provide that the parties will seek to agree the clawback payment and, failing that, it can be referred to a valuer for determination.
6. Binding future successors
The agreement should oblige the purchaser to require future successors in title to the land to enter into an agreement with the seller on the same terms. This ensures that if the property is sold before a trigger event, the seller retains the benefit of the clawback arrangements for the remaining period of the agreement.
A standard security is required to back-up the clawback agreement. Without it, the risk is that the purchaser sells on without their successor entering into equivalent arrangements, leaving the seller with only a contractual claim against them. The security appears on the title and makes future buyers aware of the existence of the clawback; well-advised buyers will not purchase a property subject to a security.
Finally, it is worth considering what property the clawback agreement will apply to.
The existence of a clawback agreement (or more importantly the relative standard security) is likely to complicate a purchaser’s ability to grant a standard security over the property to a lender. While the clawback security would rank behind a lender’s security, most high street lenders will not regularly deal with clawback arrangements, so it could affect the purchaser’s ability to get funding (or funding on good rates) - or simply add time and cost to the deal.
The parties might consider agreeing that only part of the property is subject to the security e.g. the garden ground with development potential, but not the house. If the purchaser is in a position to buy that part without having to grant a standard security to a lender, it may simplify matters.
While clawback agreements can be a comfort to a seller seeking to ensure they don't lose out on potential "hope value", if the terms are weighted too heavily in a seller’s favour, they can be considered unreasonable or overly onerous on a purchaser. That said, a purchaser with no plans to develop a piece of garden ground might be happy to enter into such an agreement, knowing they will never trigger it.
It goes without saying that an effective and enforceable agreement is not necessarily a straightforward matter; it requires bespoke drafting, and can involve multiple parties (and their solicitors) if lenders are involved in the transaction.
Sellers might consider whether there is a more suitable alternative to a clawback agreement. That might involve restricting the rights granted with the property - for example, if the seller knows that a residential development on the property would not be possible without additional drainage rights into the neighbouring field, then those should not be granted at the outset.
Alternatively, the seller may simply seek to agree a sale price at the outset, which considers any “hope value” potential.