Overage agreements have been in the news recently. Leading agents say that negotiating overages can add several months to the conveyancing process, yet these complex agreements are becoming increasingly popular.
What is an overage agreement?
Also known as claw-back or uplift, an overage is an agreement that the buyer will pay extra, on top of the original purchase price, if and when certain events happen. For example, if the buyer increases the value of the land by obtaining planning permission.
Why are overages popular? If you’re a seller, it means you can still benefit from an increase in the value of your land, after you’ve sold it. So if you sold a couple of fields and your buyer subsequently gains planning permission to build 80 houses on them, you can claw back some of the increase in the land’s value.
If you’re a buyer, an overage agreement can help you buy land or property for a lower initial price, with the proviso that you’re committed to paying more if it gains in value.
The overage is usually defined as a percentage of the increase in value gained by permission for change of use or development.
What percentage the seller will receive is just the starting point for negotiations; there are many other overage variables that must be decided. Our advice is to ensure they’re all agreed before you instruct your solicitor to go ahead with the sale or purchase.
So if you’re about to buy or sell property with a new overage agreement, what are the five key factors you need to consider?
1. Allowing cost deductions
It can be very expensive to obtain planning permission and satisfy s106 agreements and infrastructure requirements. The buyer will want these costs deducted from the final uplift payment; the seller will probably want to negotiate.
2. When is the payment trigger date?
An overage can have any number of triggers for payment. Sellers often want the uplift payment made when planning permission is granted. But that can cause problems if you’re a buyer. It can give you cashflow issues, as you can’t accurately predict when or if permission will be granted.
We recommend the trigger date should be whichever happens first: implementation of planning permission or disposal of the land with the benefit of planning permission. This makes it easier to control the timing of the payment and factor it into your cashflow.
3. How many triggers will there be?
There’s often confusion in overage deeds about whether the overage ends after one payment is made or if it should pay out for every trigger event during the overage period.
Understandably, the buyer will want the former and the seller would prefer the latter. Whatever is agreed must be settled at the outset..
4. Which disposals are permitted?
Disposals such as the grant of legal charges, short leases or easements are not usually intended to be part of the overage. However, the agreement needs to spell out exactly which disposals are permitted, to avoid incurring unnecessary costs for giving consents.
5. Agreeing fees
Usually the buyer is responsible for the seller’s costs in providing consent to a disposal, but where there are likely to be multiple plot sales requiring a large number of consents, you can expect a good deal of negotiation.
In these circumstances, and in fact for all aspects of the overage, it’s vital both parties are clear about the agreement terms to avoid complications and delays to exchange.
If you’re buying property with a new overage, it’s worth considering if you can afford to pay a bit more to buy out the overage. It will speed up the transaction and may save you costs.