Demystifying overage
What is “overage” all about? Michael Higgin helps landowners who are new to the topic to understand what it is and how it all works in practice.
In our Strategic Land Team we often get enquiries from landowners who have been approached by developers or planning consultants about putting their land forward for development. Those landowners may have professional advisers, or friends and neighbours with some knowledge, who suggest that they should “have overage”. It’s also very relevant in any sale of open land, whether greenfield, brownfield, garden, orchard or paddock land. But what does “overage” mean?
In short it is a sharing of realised profit, or the sharing of an increase in value, between the new owner and the seller. So far so simple. But how is it calculated?
What percentage?
There is no “law” on this, and it is a matter for agreement between the parties. There should ideally be “something in it” for both parties in the new situation, but the new owner will generally get a (materially) larger share than the seller, to reward it for its work and risk in bettering the property.
A percentage of what?
As mentioned, it’s a sharing of profit or increased value. Often it relates to a change of use, or the grant of planning permission, or the grant of a better or more intensive planning permission. For example, a paddock near to a village may sell for agricultural value. The seller may want some “anti-embarrassment” protection in case the land then achieves a consent to become garden land or housing, so that the seller can then share in that change of fortunes. The buyer benefits from paying agricultural land value now, with no “hope value” added, but the seller takes comfort from knowing that the buyer isn’t “taking advantage” of the seller who may be under pressure to sell, or who is short of the cash needed to apply for consent, or who trusts their friend and neighbour’s assurances that they only want to buy the land for their ponies.
The arithmetic will look at the enhanced value achieved on the sale or the grant/implementation of planning (or whatever triggers are agreed). The parties will then deduct the market value of the land the moment before the consent was granted. It is this “difference” which is the uplift that can be shared. Developers may seek to also deduct all costs incurred by them in getting the consent, which has some fairness about it. So, when agreeing that “There will be overage.” please do think about the triggers, deductibles and where the increase comes from.
How long is it for?
There is no law on this, but anything below 5 years is short and anything over 15 years is long. It depends on what the parties agree: the longest ‘true’ overage that I have seen was for 70 years. Restrictive covenants against change of use are generally perpetual.
Who negotiates it?
Land agents and chartered surveyors are ideally qualified and experienced to help you to agree appropriate commercial terms. We have a number of excellent people and firms that we work with in this area.
Legally these arrangements are complicated, so you really should take legal advice on the initial terms and certainly on the drafting of the actual provisions. There is a fair degree of ‘algebra’ in the calculations, as well as law involved.
There are published court cases on ‘overage’ every year, because the scope for argument is considerable and the sums at stake can be very large. For example, recent cases have looked at:
- whether an overage payment was due if a developer kept the property and rented it out rather than selling-on
- whether a sale of affordable housing was a trigger for a payment
- to what extent a developer can wilfully stall meeting certain conditions which it was obliged to try to meet, in order cause a sale to then fall outside of the overage period
- whether a developer could avoid paying overage once it had got its required approval, just because the full implementation of the approval was not possible
Getting the terms right, and addressing what might happen in 10, 20 or even 70 years’ time is very important. You should provide for any relevant uplift, and not just the specific project that the present buyer may have in mind.
So. What next?
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Our article linked below gives guidance on the legal structures that are often used to effect the various types of long term land promotion contracts.
