Overage Agreements – Top Tips
Overage Agreements – a popular, but potentially risky route for a seller to try to secure a share in any future uplift in the value of the land that they are selling. To explain, an Overage Agreement is an agreement between a buyer and seller, where a buyer agrees to pay additional consideration, on top of the agreed purchase price, but only if certain events occur in the future.
Are you a housebuilder contemplating agreeing to an Overage Agreement? Here are some fundamental points to think about:
- What is the trigger for any overage payment to be determined? Is it connected, for example, to planning permission, or the sales revenue from the plot sales?
If it’s connected to planning permission, is this outline permission, reserved matters, or detailed permission?
A landowner might ask for the trigger to be the grant of planning permission. However, as a developer, commercially, you might prefer the trigger to be the implementation of planning permission, or perhaps the sale of the last unit.
- How long is the overage period? If the land isn’t to be developed immediately, or you want to sell the land on in the future, how will you trace the beneficiaries of the agreement?
- How many bites of the cherry does a landowner have? If you further improve the development value of the land by amendments to an existing planning permission, or further planning permissions, does the landowner get a share of this?
- What disposals of the property can be made without triggering the overage, for example, plot sales, transfers of land to utility companies and/or public authorities?
- How will the overage payment be calculated? When things go wrong, this can be a contentious issue and so the party’s intentions need to be made very clear.
- Given the time and costs often involved in agreeing an overage agreement, would you be better just agreeing a higher purchase price?
- You will need to consider any possible overage payments due in the future when assessing your Stamp Duty Land Tax liability for the site.
It is important that the agreement is entered into in good faith and that both parties are satisfied with the terms.
Our Real Estate Development team are experienced in all aspects of Real Estate Development, so if you are considering entering into an Overage, then allow us to assess the terms and help you make the right decision.