What is an overage provision?

An overage provision is a contractual arrangement that allows the seller of land to receive additional payments in the future if certain conditions are met.

Typically, these conditions relate to the future use or development of the land.

Benefits of overage provisions

There are several benefits to incorporating an overage provision into a land sale:

  1. They allow the seller to maximise their profits from the sale of the land, as they can receive additional payments in the future if the land is developed in a particular way.
  2. They can provide a useful source of income for the seller in the future, even if they have already moved on from the property.
  3. They can incentivise the buyer to develop the land efficiently and quickly, as they know they will need to share any future profits with the seller.

Risks of overage provisions

While overage provisions can be an effective way of maximising profits, they do come with certain risks:

  1. They can be difficult to enforce if the buyer decides not to develop the land in the way that was agreed upon.
  2. The value of the overage payment may be difficult to calculate, particularly if the future development of the land still needs to be determined.
  3. There is always the risk that the overage provision will complicate the sale of the land, as potential buyers may be put off by the idea of having to share future profits with the seller.

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Key considerations when incorporating an overage provision

1. Trigger Events

An overage clause requires the buyer to make further payment to the seller but only after an agreed trigger event has occurred.

Common trigger events could be:

  • sale of the property or land at a higher price within a fixed period;
  • obtaining planning permission for the development of the land; or
  • disposal of the property with the benefit of the planning permission.

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2. When will the overage be triggered

Planning permission is often used in some way as a trigger for overage.

However, the grant of planning permission does not necessarily release any value from the land for the buyer, who would prefer overage to be triggered by disposal or, at worst, the implementation of permission.

The implementation of planning permission is closer to realisation.

However, again, consideration needs to be given to the concept of "implementation".

Would this need to be the date upon which the planning is immune from the challenge?

If the planning permission cannot be implemented, you may face issues with this approach.

For example, the buyer may not be able to get building regulations.

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3. Triggers related to unit sales

When dealing with plot sales, consideration must be given to when the overage will be triggered.

For example, it may be when 80% of the plots are built or within a certain period following the completion of the overage deed.

You will need to ensure that overage is not triggered until the sale of the final unit as the buyer may withhold selling the final unit, and therefore the overage will never be triggered.

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4. The onward disposal trigger

Will the overage be triggered on multiple occasions during the overage period, for example, on the grant of each planning permission or the completion of each sale?

If the overage can only be triggered once, the buyer may get planning for something that would only result in a low increase in value.

This would trigger the overage but would result in the landowner only making a small profit as the land wouldn't have increased in value much.

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5. Payment

The overage agreement will specify what is payable.

Sometimes it is a set amount, or there could be a formula to calculate the amount payable.

Or you could say a percentage of profit is paid.

Sometimes the amount is linked to an index such as the retail prices index.

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Overall, overage provisions can be an effective way for landowners to maximise their profits when selling property with development potential.

However, they come with certain risks and considerations, and it's important to ensure they are properly drafted and legally binding.

If you're considering incorporating an overage provision into a land sale, seeking advice from a legal professional is important.

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