Q&A: What is overage?
What is "overage" and how might it affect my land or property transaction?
The term “overage” is often known in non-legal speak as “clawback”.
In simple terms, it refers to an amount of money that may be payable to a land owner from a purchaser of their land following the completion of the sale.
The most common overage arrangements include scenarios such as:
- Where planning permission might be obtained, in the future, for the change of use or development of the property or land in question;
- Where further or additional planning permission may be granted; or
- Where the subsequent proceeds of sale from the property or land in question may exceed a level agreed when the initial sale takes place. i.e. when the property or land is sold on quickly for profit.
As a practical example, a seller of land could be aware that planning permission might be granted for a more valuable use of the land, but cannot be certain that the permission will actually be forthcoming, or when that permission might be granted – an overage agreement would entitlement them to payment in the future upon the planning permission being granted. If the permission is never granted, the overage is never paid.
What are the advantages of overage for the land owner/seller?
Entering into an overage arrangement may be beneficial to:
- Enable a development to be maximised: it is often the case that a developer may enter into simultaneous overage arrangements with several land owners in order to secure the maximum potential development of a site.
- Enable the land owner to share in the proceeds of the success of the development should the relevant planning permission be granted in the future.
What might the disadvantages be?
An overage agreement can provide certain disadvantages, such as:
- The actual purchase price the land owner receives upon completion will be lower than market value to take account of the overage agreement.
- The land owner will have to wait for however long the overage period is, as defined in the overage agreement, and it may be the case that they do not receive anything at all if the necessary overage event/condition does not arise.
What should I do if I am buying or selling land or property with development potential?
You should liaise with your accountant or tax advisor so that you are aware of the tax consequences of entering into an overage agreement where overage is paid.
You should also take advice from a land agent who is experienced in dealing with overage arrangements and in particular to discuss the different ways that overage payments can be calculated, as there are several types of formula that can be used.
You should take legal advice. The principle behind the concept of overage is straightforward. However, the actual drafting of an overage agreement is much more complex and needs to ensure that multiple scenarios are covered. The agreement should safeguard the intentions of the parties entering into the transaction to ensure that where monies are due, there are no disputes that may follow.
If you are looking to enter into an overage agreement either as a land owner or a purchaser you should seek the advice of a legal team experienced in dealing with matters relating to overage.
At Mackenzie Jones Solicitors, we have specialist solicitors who can help. Please do not hesitate to contact Andrew Foley Jones or Sara Parry on 01745 536030.