An overage is an agreement in which the buyer promises to pay more money if and when certain events occur. For example, let’s say the buyer benefits from an increase in the value of the land by receiving permission to build on it. In this article, overage agreement UK, we take a look at the process involved and the options available to you.
Free Initial Telephone Discussion
For a free initial discussion on how we can help you deal with the legal implications of creating an overage agreement, get in touch with us today. We are experienced in dealing with all forms of commercial property negotiations and we will review your situation and discuss the options open to you in a clear and approachable manner. Early expert legal assistance can help ensure you avoid the stress of dealing with these issues on your own. Simply call us on 0345 901 0445 or click here to make a free enquiry and a member of the team will get back to you.
Are there different types of agreements?
A seller can use various strategies to keep an overage payment safeguarded. As a commercial agreement, the duty to pay must be met by both parties. It is also possible to provide security without relying on the contractual duty, and risk not being able to collect money in the event of a breach. In fact, if the developer is a special purpose vehicle (SPV) that has few assets to go after, then this is even more relevant.
In order to have protection against loss by having a legal charge on the title being sold, developers may well oppose this. This is because most development funders demand the first legal charge on the property to be used to obtain the funds. Consequently, it may be difficult to obtain the necessary funds for development by securing an overage agreement.
In order to prevent an excess payment, local governments should take caution before using restrictive covenants or ransom strips. The usage of a restrictive covenant necessitates the preservation of some land that benefits from the restriction covenant. If the restrictive covenant is voided, the agreement will be void. The implementation of a ransom strip will necessitate continuous monitoring to ensure that no prescriptive rights develop over time and retaining a ransom strip without a previously agreed-upon payment for services and a use for the proceeds is not conducive to either obtaining the best price for the original site or preserving the payment in question.
In order to protect an overage, a contract should contain a covenant protecting it, which should be protected by a limitation on ownership. Under the overdraft agreement, no purchaser is allowed to dispose of the property without the authority of the beneficiary. Lifting the restriction or providing approval is additionally required for a positive contract requirement.
What events trigger an overage clause?
As previously stated, an overage clause mandates the buyer to make an additional payment to the seller, representing a portion of the higher value of the property/land when an agreed-upon trigger event occurs. This event could include:
- The giving of approval for development or a change of use.
- Disposal of the property/land with the benefit of planning permission.
- Early implementation of planning permission and disposal of the property/land with the benefit of that planning permission.
- Disposal of the property/land at a higher price within a fixed time period.
- Disposal of the completed development.
Overage provisions allow the seller to sell at the current market value of the property/land without having to give up a portion of the development potential when it is realised.
Situations in which an overage clause may not be advantageous
Overage provisions, while useful in some sales contracts, may not be appropriate in all cases, such as:
- If the likelihood of the land/property being developed is remote, the cost of arranging elaborate payment provisions may outweigh the likelihood of the overage payment being made.
- Overage clauses may also have an impact on the initial purchase price that the buyer is willing to pay for the property/land.
- When a buyer buys property/land with the purpose of redeveloping it immediately, it is often preferred for the seller to provide the buyer an option or engage into a conditional contract for the sale. Completion occurs only once planning permission is granted, and the purchase price can then be computed based on market value using the actual planning approval obtained.
What will the payment be?
Minimal opportunity for error and the result properly reflecting the intentions of both parties are essential when calculating payment amounts.
Planning permission can lead to increased property value, or the difference between the property purchase price and property resale price where payment is based on the re-sale of the property.
In the vast majority of cases, the cost is calculated using an open market valuation. Land can be valued with and without planning authorization on the same day to provide consistency in comparison (not affected by inflation or economic events etc). It is vital to understand how these measurements will be established, especially when the resulting fixed charge is dependent on measurement.
Is the payment sufficient to discharge the obligation?
It is critical that the wording in this section of the agreement be unambiguous; otherwise, difficulties and loopholes can arise. To avoid this, it is critical that you acquire expert legal counsel.
In most cases, overages will be a one-time payment based on the property’s initial, one-of-a-kind development. However, this opens the possibility for the developer to make a little value upgrade to “clean out” the overage before making much larger and more significant changes. Although this would save the buyer from paying high costs, it would be devastating for the seller, especially if the money was being relied upon. To that purpose, it is necessary to include a good faith clause in the contract to safeguard the seller from being taken advantage of, or to stipulate that there is a minimum provision before overage takes effect, probably about 10%.
How we can help
We have a proven track-record of drafting overage agreements. We will guide you through the process and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.
How to Contact Our Commercial Property Solicitors
It is important for you to be well informed about the issues and possible implications of drafting an overage agreement. However, expert legal support is crucial in terms of ensuring a positive outcome to your case.
To speak to our Commercial property solicitors today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.
Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
Comments are closed.
