The Nuts and Bolts of Overage
What is overage, and what should be considered if a property might be sold subject to overage?
What is overage?
Overage is the term used to describe the right to receive a future payment in respect of a property. This future payment may become payable if certain events or “triggers” occur, such as if the property is sold within a certain period of time or planning consent is granted.
There are a number of reasons why a seller may wish to impose overage upon a buyer; for example, where there is a reasonable expectation that the land may be redeveloped or that a valuable planning permission may be granted in the future. Imposing overage may mean that the seller has agreed to sell the property at a price that does not include the “hope value”, being the value based on the expectation that land will get permission for development in the future. It can protect a seller against the embarrassment of selling for a price that with hindsight may appear to have been too low, perhaps because the land is hard to value and seller needs cash sooner rather than later, or does not want the cost or hassle of applying for planning permission or redeveloping in order to maximise the value of the land.
What does a Seller need to think about if they are considering imposing overage on a sale?
There are a number of common themes that need to be considered when looking at whether or not to sell subject to overage.
- How long will the overage last? This will different in every case, but if the trigger for payment is the grant of planning consent you will need to consider whether you are trying to capture the short, medium or long-term planning position of the land.
- What should the trigger event be for payment becoming due? Common trigger events in overage agreements include:
- the grant of planning permission
- implementation of planning permission
- completion of development
- disposal of the property either with or without the benefit of planning; or
- sale of the property within a specified period
If a seller decides that the trigger event should be based on planning , then there are a number of points to consider. If the trigger is the grant of planning permission, then should this mean outline or full planning permission, or approval of reserved matters? What if there is a “permitted” development that does not need a grant of consent?
If the trigger event is on a disposal, then what type of disposal should be caught? The sale of the whole or part of the property? Is the trigger only on a sale to a third party where the property has the benefit of planning permission? Will a payment be due on an undeveloped sale? Can ownership be passed to family members by gift or will? What about the grant of a lease?
Is the Seller expecting more than one “bite of the cherry”, meaning that the overage will continue to be imposed throughout the overage period regardless of the number of trigger events occurring, or is the seller expecting only one overage payment?
- When will an overage payment be due? A seller wishing to impose overage should also consider when a payment of overage will actually be made to them. By way of example, if the trigger event is the grant of planning permission then this may cause a cash flow issue for the buyer as they may not have money readily available to pay. It therefore may be sensible to consider postponing actual payment to the earlier of a sale or implementation. Will interest be due on delayed payment?
- How much overage is due? A seller can agree a fixed sum to be paid, or that a percentage sum of any price or gain is due as the overage payment. If there is a fixed price, will the price be increased by indexation or remain the fixed price throughout the overage period? If so, which index? If there is a percentage due, what will that be? Will it be based on the difference between the original price paid and (i) the new market value or (ii) the actual price paid, if the trigger is a sale? Will there be deductible sums from the overage due, such as the costs incurred by the buyer in gaining planning or implementing it?
How might overage be protected?
There are a number of ways to secure the payment of overage and each method has its own advantages and disadvantages. Three of the most common methods of security are:
- Imposing a restriction against the title to the property
This method involves the buyer agreeing to make an overage payment to the seller should the trigger event occur within the overage period and also covenanting with the seller to ensure that any onward owner of the property agrees to be bound by the terms of the overage. A restriction is then registered against the buyer’s title on completion of the sale of the property, which can be released when the overage payment is made or if the overage period expires. This is a method that is commonly used in practice, but it can be cumbersome and costly for the buyer to prepare the deed of covenant, and there are also registration issues.
- Taking the benefit of a charge or mortgage over the property
The seller can take a legal charge over the property following completion and if the overage payment is not paid to it as agreed then the seller can sell the property and take the overage payment out of the proceeds of sale. This is the preferred option where the buyer can buy without using borrowed funds, but it may cause issues for the buyer later, if they require funding at any point.
- Imposing a personal obligation on the buyer
The buyer contracts to make a further payment to the seller should the trigger event occur within the overage period. This is the simplest method, but the burden of the covenant does not bind successors in title and this method also depends on the buyer’s continuing financial strength.
Some other ways to secure the effective benefit of overage include keeping a ransom strip, obtaining a guarantee or bond, granting a lease, rather than selling, or imposing a restrictive covenant.
There are a myriad of things to be considered by a seller if they want to impose overage against a sale of property. Each sale of property is different and the terms of the overage (if any!) will very much depend very much on the nature of the property being sold, the likelihood of value being added to it, and the reasons for imposing it on a buyer. Professional advice should be sought well in advance of a sale being agreed from lawyers and land agents.
The Agricultural and Rural Property Team, and our Strategic Land Contracts team have a wealth of experience in dealing with overage and so if you are considering selling your property imposing overage or buying property which is or may be subject to overage then please contact Hazel Eccles for further information on what help we can offer.