An overage clause is sometimes included in property sale contracts and is used by the selling party as a means for them to receive additional funds after the sale has been completed if an agreed ‘trigger event’ takes place. The trigger event is generally an increase in the value of the property in the future.
Situations where an overage clause might be included in a contract
The typical circumstances where an overage clause is included in a contract is:
- Where there is an anticipation that the property may be redeveloped in the future; or
- That valuable planning permission may be granted in the future.
Other situations include where certain sellers, such as public sector bodies and charities, may be required to sell the property at the best possible price that can be obtained and an overage clause can be included to fulfil the seller’s obligation to obtain the best price.
Overage clause trigger events
As mentioned before, an overage clause requires the buyer to make a further payment or payments to the seller, representing a share of the increased value of the property after an agreed ‘trigger event’ has taken place. This trigger event could be:
- The granting of planning permission for development or change of use;
- The implementation of planning permission;
- Disposal of the property with the benefit of planning permission;
- The earlier implementation of planning permission or disposal of the property with the benefit of that planning permission;
- Disposal of the property at a higher price within a fixed time period; or
- Disposal of the completed development.
Overage clauses enable the seller to sell at the current market value of the property without having to waive a share in its development potential.
Situations where an overage clause might not be beneficial
Whilst overage provisions can be useful in some sale contracts, they might not be appropriate in all situations, such as:
- If the likelihood of the land/property being developed is remote (the cost of negotiating complex payment provisions can outweigh the chances of the overage payment ever being made).
- Overage provisions may also affect the purchase price that the buyer is willing to pay for the property at the outset. So it may be better for the seller to have the higher price now, rather than a lower price plus the possibility of an overage payment later.
- Where a buyer is purchasing property with the intention of redeveloping it straight away and the increased value of the land will become apparent on redevelopment. Then it is generally preferable for the seller to grant the buyer an option to buy the land or to enter into a conditional contract for the purchase of it, with the price being determined when the buyer exercises the option to buy or the conditional contract becomes unconditional. Completion does not occur until after planning permission has been obtained and the purchase price can then be calculated based on the market value, using the actual planning permission that has been obtained.
Positive and negative overage clauses
Overage clauses are sometimes described as being either positive or negative.
- Positive overage methods involve the seller extracting an express promise from the buyer to make a further payment if a particular trigger event should take place in the future. How the payment will be calculated and the trigger event for payment will be carefully defined in advance.
- Negative overage clauses are where the seller imposes a restrictive covenant or another mechanism, such as a ransom strip, that prevents a particular development or change of use. The seller can then require the payment of the increased monies at a later date in return for the release of the covenant or the transfer of the ransom strip.
Seek legal advice
As overage clauses usually reflect complex arrangements, it is always advisable to seek legal advice before it is included in a sale contract.
Getting the drafting right in the contract is made harder as the parties have to consider all reasonably foreseeable circumstances to ensure that the clause remains effective for the whole of the overage period.
There are various ways in which overage obligations can be drafted and secured, and the most appropriate method should be chosen to suit the particular circumstances. Each method has its own advantages and disadvantages.
How can Nelsons help?
Martin Jinks is a Consultant Solicitor in our expert Commercial Property team and also a Notary Public.
Our expert team in Derby, Leicester and Nottingham work with sellers and buyers to advise on and negotiate the right sale contracts for them.
If you are involved in a commercial property/land transaction and would like advice with regards to overage clauses or any other related matters, please get in touch with Martin or another member of the team on 0800 024 1976 or via our online form.
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