Overage agreements, or ‘clawbacks’, allow the seller of land to secure additional payments from the buyer after the land has been sold. They are a type of contract used in circumstances where a seller is to be paid additional sums by the buyer if certain events happen within a specified timeframe, such as where it is thought the land may increase in value.
In this guide, we explain the key features of overage agreements and how they are used. However, overage provisions remain one of the most common sources of property litigation, requiring professional advice when drafting and negotiating to help reduce the risk of future disputes.
When are overage agreements used?
Overage agreements are most commonly used in sales involving large plots of lands that have development potential, for instance, farmland in the outskirts of a town. Changing use of land in this way, and securing planning permission, usually increases the value of the land. However, the planning process to change the use of the land from agricultural to residential or commercial property is time-consuming and expensive, and the landowner may not have the time or inclination to take these steps before selling the land. In such circumstances, an overage agreement allows the landowner to sell the land at the current market value but if, in the future, planning permission is granted and the price of the land increases, they become entitled to a payment that reflects a percentage of the increase in value. Overage provisions within the land sale contract can also be drafted so that they are binding on subsequent buyers of the land as well.
When are overage agreements enforceable?
As they represent a significant restriction to a buyer, overage agreements require very careful drafting to ensure that the conditions are clear to both sides at the time of sale and that the agreement is ultimately enforceable.
There are different types of overage. Most of the agreements will involve a positive obligation on the buyer to make the overage payment should the change in use occur.
The most common form of clawback clause places a restriction on the title to ensure payment of the overage. This means that the buyer is prevented from disposing of the land without the initial seller’s consent. The consent to resale is then only granted by the initial seller following payment as per the overage clause.
Alternatively, a restrictive covenant may be put in place, which restricts the buyer form using the land in any other way apart from the purpose for which it was being used at the time of the sale. Therefore, if the buyer wanted to develop the land, they would require consent from the original seller. This would be granted once the overage payment was made.
Finally, some sellers prefer to ensure payment is made by keeping parts of land, commonly known as ‘ransom strips’, which make it impossible for the buyer to develop the land without first purchasing them. This could include retaining ownership of the land surrounding the plot, whereby the developer would be required to gain a right of access to them to complete the development. In practice, however, this is generally not a cost-effective way of gaining further payment as it requires careful monitoring and precise drafting of the agreement.
What should an overage agreement include?
Overage agreements are not straightforward, and you should always consult a solicitor to take you through the process and ensure your specific circumstances are considered when drafting a clawback provisions. In general, however, overage agreements would typically include:
How is payment triggered under the overage agreement?
How the event is defined will determine the level of payment and can help to avoid disputes.
Commonly the event that triggers payment is the sale of land following the grant of planning permission, although sometimes it is the implementation of planning permission or occasionally the award of it. But what if the trigger event is linked to the grant of planning permission, is that outline planning permission or detailed? What if it is awarded, but the conditions imposed by the planning department are not acceptable to the developer? A developer may make an initial planning application that only changes the value slightly, makes the overage payment based on that, and then reapplies. A carefully drafted agreement can cover multiple trigger events to avoid this situation.
A solicitor will be able to look at your particular set of circumstances and advise how to frame the trigger event to offer you the most protection.
How long will the overage agreement apply for?
This is the length of time the provisions will be enforceable for, stated as a set number of years. While there is no standard time limit for enforcing overage clauses, they usually last until planning permission is granted or the development is completed (and all the units are sold).
For small to medium-sized projects, the term is typically 1 to 3 years. It is rare for overage agreements to last more than 25 years, even in larger scale projects. Much will depend on the specific facts such as the scope and value of the project, and the nature of the event triggering the payment.
How to calculate an overage payment
The overage payment will be expressed as a percentage of the uplift in value of the land. The percentage should be agreed between parties in the agreement. The percentage should also be sufficient to justify the time and expense of drawing up an agreement. It could be in the region of 20 to 30%.
If the trigger is the grant of planning permission (however that is defined), then the payment will be calculated based on the value of the land with planning permission less the value without it, and the percentage taken from that. If the trigger event is the sale, then the percentage would be taken based on the profit. While that seems straightforward, the buyer and the seller should agree how the land will be valued (should your trigger not be a sale), and what expenses the buyer is entitled to deduct before calculating the uplift. This should help prevent disputes at a later date.
Tax implications of overage agreements
If you decide that you want to use an overage agreement as part of your sale, then you also need to consider whether there are any tax implications. You should consult a tax expert, as there is likely to be Stamp Duty Land Tax implications.
What happens if the land is sold on with no grant of planning permission, or for no profit?
It is critical that your overage agreement applies not just to the buyer, but to successive buyers, notably if you have opted to have your agreement apply for a substantial period. The positive obligation in your overage agreement will not automatically pass with the title. To ensure that you do not miss out you, or your solicitor should consider what steps you can take to bind subsequent buyers. This might influence the type of agreement you decide to include in your contract.
Can overage agreements be removed?
It may be possible to remove overage agreements. Usually, this would involve ascertaining who the parties are that enjoy the benefit of the overage provisions. Next, a Deed of Release would need to be signed with these benefitting parties to remove the overage, which typically involves a covenant, ie a promise to pay, and to procure deeds of covenant from successors to ensure they pay, too.
Should I buy a property with an overage clause?
Overage clauses make property negotiations and transfers considerably more complicated, and costly. Buyers should take professional advice when considering buying a property with an overage clause or agreement since many factors will need to be taken into account, including how much the seller will be entitled to, how the overage is to be calculated, and how long the provisions are to apply for.
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services - a Marketing Agency for the Professional Services Sector.
