In the context of property transactions and land sales, an “overage” is used to describe a sum of money, in addition to the original sale price, which a seller may become entitled to in the future subject to certain trigger events. Essentially it is used as a tool to compensate a land owner to ensure they receive the best possible price, as the best possible price may only be available at some point in the future, or upon certain trigger events. Where overage is used it is obviously a point of negotiation between seller and buyer and it may result in a lower up-front price being accepted by the seller, but with them having the opportunity to participate in any potential future increase in value achieved by the buyer, particularly where the buyer is looking to develop the land.
However, whilst the principle of overage can be outlined very briefly in one paragraph (as above), there are various permutations as to what may constitute the overage clause and lots of considerations that both seller and buyer must bear in mind when negotiating the same. It is not uncommon for the overage provisions to become the main focus of the negotiation on any given land deal.
Whilst there are many different permutations of what can be negotiated, it is imperative that everything is covered off within the drafting but also that it does not become over complicated and impossible to follow.
Some of the many considerations to bear in mind are:-
• How long will the overage period last (i.e. for what time period might the buyer be liable to pay the seller an overage payment?);
• What will be the amount of overage (e.g. will it be a percentage of any uplift in value, will it simply be linked to increase in value or will it take into account costs incurred by the buyer, perhaps in developing the site or obtaining planning etc. (i.e. more linked to profit than solely value)?;
• Will the overage be linked simply to a future sale (i.e. if the buyer sells in the short term at a significantly increased value due to a rise in market prices), or will it be linked to obtaining planning permission, or perhaps only if planning is implemented, or maybe only if the site is developed out and sold off;
• If there is overage linked to future sales will the payment be made on the sale of the first plot or once all plots on the site have been sold or on an apportioned basis?;
• How will the overage be secured (restriction and/or legal charge)?
The above are just a few of the initial considerations, the list could quite literally run and run! What is most important of all is, whether you are a seller or a buyer, that you take advice if you are looking at overage.
Our Legal 500 recognised Commercial Property Team have a wealth of experience in dealing with such matters and pride ourselves in working hand in hand with the our clients agents (who have negotiated the deal) to ensure that all bases are covered.
For further advice call 0800 088 6004.