What is Overage?
Overage is a condition placed on the sale of a property. Overage means that the buyer has to make a payment, on top of the agreed purchase price, if a pre-agreed event is triggered at a later date.
The event…
This is normally if residential planning permission is obtained on the land, but can also be commercial development, the conversion of any farm buildings or a change of use.
The payment…
Is usually expressed as a percentage of any uplift in the value of the land due to the ‘event’ taking place. It is also referred to as uplift or clawback provisions.
The ability to predict the probability of obtaining planning permission has become much more difficult as the pressure and demand for development has increased. The difference between the value of land once planning permission is obtained and agricultural values is enormous. Consequently, sellers want to make sure they do not lose out in the future, so they choose the overage route.
The disadvantages
Insisting on overage does have its downsides as adds complication to the selling process. To ensure it stands up to scrutiny, the documentation needs to be drafted with care, establishing exactly what events would trigger any payment is critical.
Thrashing out the details of the overage can take months, which inevitably slows down the sale process and adds to legal costs. It doesn’t matter how much you set out the parameters for overage at the outset, there is a lot of detail to be got through which becomes a separate negotiation in its own right.
Although it has become more of an accepted norm in the marketplace, buyers will push back if they think the balance between risk and reward is wrong.
Indeed, purchasers will often pay more for land without overage provisions and may use the presence of overage clauses to reduce the price they are prepared to pay at the outset.
Alternatives
An alternative can be to put a restrictive covenant on the land that is being sold to prevent it being developed. If the buyer wants to develop the land at a later date they would need to offer the vendor a financial incentive to release them from the covenant. However, this is only an option for landowners who have land physically adjacent to the land which they are selling.
If you would like further advice with regards to anything mentioned above, please contact Charles Daniell on 01684 325215 or 07814 033449.
