What is an Overage agreement?
An overage clause is sometimes included in sale contracts and is used by the selling party to receive additional funds after the sale has been completed if an agreed ‘trigger event’ occurs. The trigger event is generally an increase in the value of the property due to further development.
When are overage clauses used?
Where the property may be redeveloped in the future; or valuable planning permission may be granted in the future.
Other situations include where certain sellers, such as public sector bodies and charities, may be required to sell the property at the best possible price and an overage clause can be included to achieve this.
As mentioned before, an overage clause requires the buyer to make a further payment or payments, representing a share of the increased value of the property after a ‘trigger event’. This trigger event could be:
- The granting of planning permission for development;
- The implementation of planning permission;
- Sale of the property with the benefit of planning permission;
- Sale of the property at a higher price within a fixed time period; or
- Sale of the completed development.
Where an overage clause may not be beneficial
Overage provisions can be useful in sale contracts, they might not be appropriate in all situations, such as:
- The likelihood of the land or property being developed is remote;
- Where a buyer is purchasing property with the intention of redeveloping it straight away. (Then it is generally preferable for the seller to grant the buyer an option to buy the land, with the price being determined when the buyer exercises the option to buy. Completion does not occur until after planning permission has been obtained and the purchase price can then be calculated based on the market value, using the actual planning permission that has been obtained.)
Protection of overage provisions
Overage clauses can be described as being either positive or negative.
Positive overage methods involve the buyer promising to make a further payment if a particular trigger event takes place in the future. How the payment will be calculated and the trigger event for payment will be carefully defined in advance.
Negative overage clauses are where the seller imposes a restrictive covenant or other mechanism, such as retention of a ransom strip, preventing particular development. The seller can then require the payment of the increased monies in return for the release of the covenant or transfer of the ransom strip.
As overage clauses usually reflect complex arrangements, it is always advisable to seek legal advice before it is included.
Getting the drafting right is made harder as the parties have to consider all reasonably foreseeable circumstances, to ensure that the clause remains effective for the whole of the overage period.
If you need any further information on this matter, please contact our offices on 01228 522215 (Carlisle) or 016973 42121 (Wigton).