Overage Advice

What is overage?

The term overage means where a seller is trying to obtain part of any increase in the value of the property after that property has been sold to the buyer.

When is overage likely to be used?

The two most common situations where overage arises are:

• A seller expects that the buyer will redevelop the property a significant increase in the value of the property. Here the seller wants to share in the increase in value if and when the development takes place.
• The seller is a public sector or similar organisation such as a charity, who is required to obtain the best value than can reasonably achieved from the sale of the property. Overage is used by these organisations as a safety net in case the value of the property increases rather than any expectation of sharing in any increase in value.

When will this overage payment become due?

This will depend on the drafting of the overage provisions in the agreement and are negotiated between the parties. Any payment will be triggered by certain events that are set out in the agreement. Typically these events include:

• grant of planning permission
• implementation of a planning permission
• disposal of the property with the benefit of planning permission
• disposal of a certain percentage of the completed development
• disposal of the completed development

How is the payment calculated?

This will be set out in the overage provisions in the agreement. This will be typically expressed as a percentage of any increase in value of the property after deducting various expenses paid by the buyer. The provisions will set out how the value of the property is to be valued and should also cover how to resolve any dispute as to the value and/or the overage payment.

How can these obligations be secured?

A particular difficulty with overage obligations for the seller is ensuring that the buyer is liable to make any payment due.

There are many ways that the seller can attempt to secure and protect their interest, with this being a point for negotiation and discussion. Each method has its own advantages and disadvantages and care must be taken to ensure the seller has the protection they require.

Some of the more common ways of securing overage obligations are:

• Positive obligation –the buyer gives a contractual commitment to make the overage payment. However, this will not bind successors in title.
• Positive covenant and restrictions – in addition to the positive obligation the buyer can commit to ensuring that any successors in title will enter into a similar positive contractual obligation with the seller. This is backed up by a restriction on the title for the property meaning the property cannot be sold without the original seller’s consent. This consent is given when the new buyer enters into the positive obligation. This can lead to a complicated system of consents and commitments.
• Mortgage or legal charge – the seller can take a legal charge over the property. If the overage payment is not made within a time frame after the triggering event has occurred, the seller will be able to sell the land and recover the overage payment from the sale proceeds. This is unlikely to be acceptable if the buyer uses a lender to finance the purchase of the property.
• Restrictive covenant – the buyer covenants with the seller that it will not build on the land or use it for certain purposes. This will bind successors in title. The seller will demand a payment to enter into a release of these covenants. If this method is used the seller must be careful to retain land that can genuinely benefit from the restrictive covenant.
• Ransom strip – the seller retains a small strip of land that is adjacent to the property sold to the buyer, which prevents the buyer being able to redevelop the property. The seller then agrees to sell the ransom strip, or grant rights over it, in return for a payment from the buyer.

If you need any advice on overage, please contact a member of our commercial property law team in confidence here or on 02920 829 100 for a free initial call to see how they can help.