What is an overage agreement?
An overage agreement is a contract in which a buyer agrees to pay a seller a sum of money if the land they buy increases in value. Overage agreements are also called ‘clawback’, ‘uplift’ and ‘anti-embarrassment’ agreements.
How overage agreements work
A buyer pays a seller an overage payment when a certain event is triggered. An event could be:
- Planning permission has been granted.
- Construction has started on a development project.
- Change of land use has been granted (for example, land use has changed from agricultural to residential).
- A certain number of properties have been built.
- A certain number of properties have been sold.
Overage agreements do not only benefit sellers. For buyers, there is the potential to purchase land at a more reasonable price. If a buyer does not commercially benefit from the land they have bought, they will not have overpaid for it. In addition to this, if less money is made from the land than expected, the buyer may not have to pay overage to the seller.
What is an overage clause?
Overage clauses are sometimes included in sales contracts for commercial land or property. When an event is triggered (such as planning permission being granted), the buyer must pay the seller a sum of money even though they no longer own the land.
How we can help
Parkinson Wright solicitors can help you with the following:
Drafting overage agreements
Agreements must be clear and detailed to prevent disputes from arising later. An overage agreement covers:
- The duration of the agreement. This can be 25 years or sometimes more.
- Overage triggers. For example, when land is sold to a third party for a high value.
- Size of the overage payment and how the payment will be calculated.
- Security. The seller might secure a ‘charge’ over the land to ensure the buyer pays them any overage due before selling the land to a third party.
- Release date. This is the date the overage agreement ends.
Negotiating the commercial and legal terms of an overage agreement
Our solicitors can make sure your commercial interests are protected by negotiating the most favourable terms on your behalf.
There are many points of negotiation in overage agreements. Buyers normally want to minimise the length of an overage agreement, whereas sellers often want to lengthen the period. A ‘trigger event’ is more likely to occur in a longer agreement which is in the seller’s best interests. Where there is a shorter overage period, a buyer may hold off selling land or securing planning permission until the agreement release date.
Trigger events are also open to negotiation. A buyer may not want a grant of planning permission to be a trigger because they will not make any money on the land at this point. They will only make money when they develop and sell the land.
Overage payments are calculated in several different ways, and this is a point of negotiation between buyer and seller. The buyer might agree to pay the seller a fixed sum of money for each plot developed on a piece of land, or alternatively to pay a percentage of the increased value of the whole plot of land. The buyer’s costs (for example, the cost of obtaining planning permission) may be deducted from the overage payment.
Whatever method is used to calculate overage payments, it is important that both parties are clear from the outset. An overage agreement should include examples to show how overage will be calculated in practice.
Securing an overage agreement
Although an overage agreement is legally binding between a seller and a buyer, additional security may be advisable. If a buyer’s business winds up or they get into financial difficulty, it can be hard for a seller to obtain overage payments.
A seller can further protect their interests by:
Registering a restriction on the land title. This will prevent the buyer from selling the land to a third party unless the third party agrees to take on the overage agreement.
Register a charge against the land. This means if the buyer does not pay overage, then the seller may be able to repossess the land or force the buyer to sell the land so overage can be paid.
Security terms will need to be negotiated between the parties. Although registering a charge against land is the best way for a seller to protect themselves, for a buyer, this can reduce the value of the land. In addition, if money needs to be borrowed to purchase the land, the buyer’s lender may not agree to a charge.
Why choose Parkinson Wright overage agreement solicitors?
Parkinson Wright can draft and negotiate overage agreements that are fair and reflect the value of your investment. We will make sure the correct legal framework is in place to protect your future business and financial interests.
Parkinson Wright solicitors have several accreditations, so you can rest assured you will receive expert legal advice and the highest level of customer service.
Solicitors Regulation AuthorityRegulated and authorised by the Solicitors Regulation Authority (SRA).
Lexcel Quality MarkWe have achieved the Law Society’s Lexcel Legal Practice quality mark, which sets the standard for client care.
Get in touch
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