Jane Gunnell, in our Commercial Property team, discusses overage agreements and whether to include one in a development land deal.
What is an overage agreement?
“Overage” is the colloquial name for a future payment made to a former landowner who has sold land which may be developed and then (usually) sold for a higher price in the future.
Looked at objectively, it is a strange concept.
A landowner is entitled to exploit his land for their own benefit, whether by occupying it, receiving rental income from it, or running a business from it. When they sell a property, it is no longer theirs, so why should they receive more money for it later if they have already been paid in full and handed over the (virtual or actual) deeds and any keys?
Land values increase with inflation, when there is a shortage of properties available, or, and usually most dramatically, on a change in planning status. Any landowner with enough money to pay the costs of making a planning application, can potentially increase the value of land while they are still the owner. Alternatively, they can do a deal with a promotor or a developer by way of a conditional contract or promotion agreement. Such arrangements will leave the landowner with ownership and use of the property until the development gain crystallises.
Selling at full market value with the right to a future overage payment is almost too good to be true, as it is literally the opposite of the normal no risk, no reward scenario that usually exists in a property development context. Overage can be described as no risk for what is often a substantial reward! No wonder well advised buyers’ lawyers spend so much time on negotiating the finer points of the drafting.
Attaching an overage obligation to a straightforward sale is currently back in vogue. Clients’ expectations are often fuelled by advice from professional advisers who have not always thought hard about whether the transaction is really suitable. In many cases, the land stands little chance of being developed within a reasonable timescale, if at all. Sales are often delayed for months while detailed wording is negotiated, and in some cases it is simply too hard to reach agreement, leaving all parties involved feeling disappointed and out of pocket for wasted time and effort, not to mention legal fees.
Our advice on overage agreements
Our advice is to avoid adding the complication of an overage arrangement unless the circumstances of the sale really justify it. In the right cases however, we know from direct experience that some very large sums have been paid over to former landowners, even many years after the original sale.
If your mind is set on imposing overage, please pay particular attention to agreeing the key terms in sufficient detail at the outset:
How long will the obligation last and will it bind all future owners?
What will be the triggers? The grant of planning permission, the start of building, or sale? Will there be a single trigger or multiple triggers?
How will the payment be calculated? Will some or all of the developer’s costs be deductible?
Finally, please consult an experienced development solicitor before agreeing terms. Surveyors and agents will also advise you, but the documentation is always prepared by lawyers, and anyone who says “leave the detail to the lawyers” is not giving good advice! Several of our team have been advising on this niche area of law for many years, working closely with colleagues experienced in planning law.
For further information or legal advice, please contact law@blandy.co.uk or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.
