Overage Clauses – 10 Things To Think About For Buyers

Properties are sometimes sold subject to overage clauses – also known as uplift or claw back provisions. The idea is that, if planning permission is subsequently obtained, the seller will be entitled to a share in the uplift in value. This sounds simple but provisions of this nature give rise to a wide range of legal problems and are often a dispute in the making.

As always, the devil is in the detail. Points to watch out for as a buyer are:-

1. How long do these provisions apply? They are commonly imposed for up to 25 years but this is a very long time. Arguably they should only apply where there is a realistic chance of obtaining planning permission within the next 5-10 years.

2. What percentage state in the uplift in value should the seller be entitled to? The seller often begins by asking for 50% of the uplift in value but this is likely to leave the buyer with little commercial incentive to develop the land. Bear in mind that the buyer will incur various costs – planning costs in obtaining the permission, costs in selling the land and capital gains tax, for example. Some overage clauses allow costs to be deducted before the overage is calculated; otherwise a 50% overage may leave the seller with a greater profit than the buyer.

3. What triggers the payment to the seller? From the buyer’s point of view, this should not be the grant of planning permission but either: –

• the implementation of a planning permission (for example, where a buyer builds a new house to occupy himself); or
• the sale of the property following the grant of planning permission.

4. Will any planning permission trigger the payment? Often the parties intend the overage clauses to apply only if permission is obtained for residential development but most overage clauses apply if any planning permission is obtained. The buyer may, therefore, want to exclude certain types of development from the overage. For example, in the case of a farm, the buyer may wish to exclude:-

• any buildings for agricultural use;
• any equestrian use for buildings;
• any renewable energy/telecoms installations;
• any commercial use (such as the conversion of barns to offices or workshops); or
• extensions to the farmhouse or the erection of a house with an agricultural tie for a farm worker or family member.

Some of these changes may not require planning permission at present but it is best to exclude them for the avoidance of doubt – bear in mind that planning rules may change in the future.

5. How is the overage to be calculated? Often there can be quite a complicated formula in the documents. Check if this is correct by working through some examples, taking note to ensure that the payment to the seller does not include normal “inflation” increases in value.

If the parties cannot agree on the amount of the overage (which is usually based on the difference in open market values of the land with or without the planning permission in question) then this will be determined by an independent surveyor. This can be an expensive process and something of a lottery as different surveyors can have very different views on market values.

If interest is payable on the overage payment, make sure this runs only from when the overage payment has been agreed or determined by the independent surveyor. If interest runs from the date of the permission, this can give rise to a big interest bill whilst the price is being sorted out.

6. Will the seller have more than one bite of the cherry? Most overage clauses apply each time planning permission is obtained during the overage period. So, if a previous overage payment has been made based on a permission for, say, 5 houses, a further payment will be due if permission is subsequently obtained for 10 houses. It is important to ensure that the credit is given only for the first overage payment.

7. How is the overage secured? Usually, a seller will impose a restriction on the buyer’s title so that future dealings cannot be registered at the land registry without the consent of a seller. This is necessary from the seller’s point of view to ensure that the new buyer enters into a new deed of covenant to pay the overage (as positive covenants of this nature are not otherwise binding on the buyer’s successor in title). A restriction can, however, cause problems or delays on future dealings and a buyer should try to exclude remortgages and short-term leases from such a restriction.

Sometimes the seller requires a charge back over the property to secure payment of the overage. A buyer should resist this, particularly if they are raising finance through a bank to purchase the property. The bank will want a first charge and may not be happy for the seller to have even a second charge.

8. The benefit of the overage is an asset. This can be sold by the seller or, if the seller passes away, the benefit may pass with their estate. It can, therefore, be difficult in the future for the buyer to know who has the benefit of the overage. This causes further problems, particularly where there is a restriction on the buyer’s title which requires the person having the benefit to consent to any future dealings.

A buyer should, therefore, ask for the documents to require the buyer to be notified of any change in the persons having the benefit of the overage but, even then, practical problems often arise when this is not done.

9. Overage clauses complicate the buyer’s tax position. If an overage payment is triggered, further Stamp Duty Land Tax will be due (as the purchase price has increased). Indeed, HMRC requires that, on completion of the purchase (even if the payment of an overage is very remote), the buyer should pay SDLT on the purchase price and the estimated enhanced value of the land if the overage is triggered. The buyer may, however, apply to the HMRC for the deferment of any extra SDLT which may become due if the overage is triggered.

In the case of a commercial property, if the original sale was subject to VAT, then VAT will also be due on any overage payment.

10. Overage provisions make negotiations of the purchase contract and transfer much more complicated. This inevitably results in additional legal fees for the parties and delays in agreeing the documents. In addition, overage provisions have given rise to many disputes before the courts. It may, therefore, be worth considering if there is another way of restructuring the deal – perhaps by a slightly higher price being paid in the first place.

This is a general information sheet only and must NOT be relied on in relation to any particular matter. Overage provisions are very complicated and specific advice should be taken in relation to any transaction involving overage.

We are unable to give general or specific advice on matters relating to overage except to our existing clients. However, if you would like us to give you a quote, please contact us and a member of the Commercial Property Department will get back to you.