What is an overage agreement?
Posted on 18th March 2024
An overage agreement, often referred to as a “claw-back” or “uplift” agreement, is a significant aspect of property transactions, particularly in the conveyancing process. This legal agreement can play a pivotal role in negotiations and the eventual sale price of a property, contingent upon specific future events. In this blog, our Conveyancing Solicitors in Lancaster discuss what an overage agreement is, its purpose, and scenarios where it may be required, offering a comprehensive understanding of this important conveyancing element. If you believe you may need an overage agreement when buying or selling your property, contact our expert conveyancing solicitors today on 01524 581 306 or email property@mglegal.co.uk.
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What is an Overage Agreement?
An overage agreement is a contractual provision between the seller and buyer of land or property, allowing the seller to receive additional payment(s) if certain conditions are met after the sale. These conditions usually relate to the increase in value of the property due to specific developments, such as obtaining planning permission or the completion of certain improvements that enhance the property’s value beyond the original sale price.
What is the purpose of an overage agreement?
The primary purpose of an overage agreement is to ensure that the original owner (seller) benefits from the increased value of the property resulting from future developments, which were not factored into the initial sale price. It’s a way for sellers to retain an interest in the potential future value of the property, even after ownership has transferred to the buyer.
For example, if a person is selling land for a small value, when there is the potential it could be worth much more, but the seller cannot fund any development, they may consider an overage agreement, so the buyer benefits from the reduced value of purchasing the land, but the seller has the benefit of the work carried out in the future.
When are Overage Agreements Required?
Overage agreements are particularly relevant in several scenarios, including but not limited to:
Land with Development Potential
If land is sold without planning permission but has the potential for development, the seller might use an overage agreement to secure a share of the increased value if the buyer later obtains permission for residential or commercial development.
Conditional Planning Permission
Sometimes, land is sold with planning permission that is subject to certain conditions being met. An overage agreement can ensure the seller benefits if the value increases once these conditions are satisfied and development proceeds.
Long-term Development Projects
For large areas of land earmarked for phased development over several years, an overage agreement can protect the seller’s interests, allowing them to benefit from the incremental value increase as different stages of the project are completed.
How Does an Overage Agreement Work?
An overage agreement specifies the conditions under which additional payments would be made to the seller, how these payments are calculated, and when they are due. Key elements include:
Trigger Events:
Specific developments or events that must occur for the overage payment to be made, such as obtaining planning permission or reaching certain construction milestones.
Calculation of Overage:
The method for determining the amount of overage payment, often based on the increased value of the property attributable to the trigger event.
Duration of the Agreement:
The time period during which the agreement is valid, which can range from a few years to several decades, depending on the anticipated development timeline.
Protection Mechanisms:
Provisions to ensure compliance, such as restrictions on the land registry or requiring a charge over the property.
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Why are Overage Agreements Important?
Overage agreements are vital for balancing the interests of sellers and buyers in property transactions involving potential future value increases. For sellers, it offers a way to capitalise on the property’s future potential, while buyers gain the opportunity to develop the property with the understanding that a portion of the increased value will be shared with the seller, often acquiring the land at a lower cost to reduce their upfront spending.
Which type of Overage Agreement do you need?
Our Conveyancing Solicitors in Lancaster always recommend seeking legal advice before making a decision about your overage agreement, because a mistake in the type of agreement could cost your thousands-upon-thousands of pounds in the future.
Here are some common overage agreements our Conveyancing Solicitors deal with:
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.
Sometimes, 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.
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.
What needs to be included in an overage agreement?
You should always ensure that the following points are covered in any overage agreement:
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.
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.
The percentage of uplift to be paid.
How long the provision to pay the uplift will stay with the land i.e. are we talking six months, ten years, or one hundred years?
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 all the benefit from the agreement, but the Buyer may wish to limit the number of times that the Seller can come back and claim money, so there is a limit to the agreement.
Will the Overage Agreement pass on to future Buyers or will it only matter in this instance?
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.
Understanding overage agreements is essential for anyone involved in buying or selling property, particularly where there is potential for future development. These agreements require careful negotiation and precise drafting to ensure that the interests of both parties are adequately protected and that the terms are clear and enforceable. Whether you’re a seller looking to secure a fair share of your property’s future value, or a buyer aiming to develop land with potential, considering an overage agreement is a prudent step in the conveyancing process and advice should be sought from our Conveyancing Solicitors in Lancaster to decide what the terms of your overage agreement should be. Engaging a knowledgeable conveyancing solicitor to guide you through the intricacies of overage agreements can ensure that your interests are well protected.
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Tagged as: Conveyancing, Solicitors in Lancaster
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