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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.
There are several benefits to incorporating an overage provision into a land sale:
While overage provisions can be an effective way of maximising profits, they do come with certain risks:
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:
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.
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.
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.
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.
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.
If you need legal advice concerning of overage provisions, please contact our expert commercial property solicitors on: