What is an overage agreement?
Posted on 27th February 2019
Imagine selling your property for peanuts then discovering that it is a prime site for development. Your Buyer then sells the land or property for millions, and you’re sat wishing that you could get your cut. Or if you were the Buyer - imagine the Seller knocking on your door three years later demanding a cut of the money you have made selling the property on.
MG Legal, conveyancing Solicitors Preston, know that this can be a worrying thought for both sides involved in the transaction.
Overage, clawback and uplift each describe the same thing. That is, where the Seller sells land at its current value with an agreement in place whereby additional payments can be demanded after the completion of the sale.
What this means is that, if there is an overage agreement in the contract for sale and you purchase the property, then the Seller can request an agreed sum in respect of any profit made on the property they sold to you.
The provisions for overage should always be included within the contract and the additional payments are usually made when a “trigger event” occurs. A trigger event may be the Buyer obtaining planning permission or the Buyer may purchase other plots of land around the site which then becomes an area large enough to become a development site.
If you agree to an Overage Agreement or a clause being put in the contract, then when a trigger event increases the value of the land you are agreeing to pay the Seller a percentage of the increase in value. Hence why Overage Agreements will sometimes be referred to as ‘uplift’ agreements – the value of the land has been uplifted by a trigger event.
If you agree to an overage agreement when buying land, then it is important for the wording to be incredibly well drafted so both the Buyer and Seller of the land will know exactly what is payable and when. Don’t worry though, MG Legal, Conveyancing Solicitors Preston are pros at this, and we can help guide you through the process.
Which type of Overage Agreement do you wish to put in place?
1. Ransom Strip – The Seller retains strips of land and the Buyer would need to grant a right of way over that particular piece of land when carrying out any development. This would mean that the Buyer would have to monitor their strip of land so that they know when their strip of land is being passed over in order for them to be able to claim their uplift. However, this can be a very onerous way of seeking an uplift and the overage is not always protected if there is no clear agreement already in place!
2. Sometime, restrictive covenants, will be put in place which prevent the Buyer for doing anything with the land other than what it was purchased for. So if you were to purchase agricultural land you may enter into a covenant which states you can only carry out agricultural activities on that land. If you wish to then develop the land the Seller would be required to give their consent. The Buyer would have to pay the uplift when seeking the consent, but this method is not always fool proof. Covenants con be difficult to enforce, and the Seller must retain some land which benefits from the restrictive covenant.
3. A positive covenant – this would be an agreement for the Buyer to pay any uplift and there would also be a restriction on the land which would mean that the Buyer would have to obtain the consent of the Seller if they wanted to then develop the land. This is often the most common method utilised when it comes to Overage Agreements because the Buyer pays the “uplift” when they ask for the consent to develop the land.
You should always ensure that the following points are covered in any overage agreement: -
1. How the value of the land, with planning permission, will be assessed. Remember the uplift can derive from the increase in value of the property once planning is granted or by the land being sold.
2. What expenses the buyer can deduct from the increase in value. For example, the Buyer may wish to deduct the costs of obtaining planning permission from the uplifted value.
3. The percentage of uplift to be paid.
4. How long the provision to pay the uplift will stay with the land i.e. are we taking six months, ten years, one hundred years...
5. You should then consider any other matters which will specifically affect that land. For example, if the land covers a massive area then perhaps you want your uplift on each development plot that is sold after the development has completed or if an overage is paid when planning is granted does the overage continue to stay in place and an overage is paid again when the plot is sold? The Seller may want to have his cake and eat it, but the Buyer may wish to limit the number of times that the Seller can return to the buffet.
6. Will the Overage Agreement pass on to future Buyers or will it only matter in this instance?
7. Calculations: how is the overage paid? One method would be for the Buyer to keep any natural increase associated with inflation and the Seller is entitled to claim a share on any increase that has derived from planning permission being granted. The other method would be for the overage to be paid when the Buyer goes on to sell the land. Both the original Seller and Buyer would need to agree the value the land has increased by, the costs that the Buyer has incurred in terms of legitimate costs such as obtaining planning permission, for how long the overage charge will remain in place and what percentage will then be paid once the deductions have been taken in to account.
Even with the above points agreed there can still be disputes in terms of what happens if a Seller dies and the Estate of the deceased wishes to claim the overage payment, or what if the original Buyer becomes bankrupt, what if the Seller cannot be traced when the Buyer comes to sell the land on and what if restrictions on the property have not been effectively adhered to?
The above worries can all be settled by an effective agreement being put in place. The Parties intentions must be documented and correctly recorded in a clear agreement with distinct obvious methods of mediation should the Parties have a dispute.
MG Legal, Conveyancing Solicitors Preston can help you help your future self. Contact us now on 01995 602 129 or via firstname.lastname@example.org to discuss all your property matters.
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