Overage agreements or ‘clawbacks’ both refer to the same legal mechanism that allows the seller of land to secure additional payments from the buyer after the land has been sold.
They are often included in a contract for the sale of land, where it is thought that the land may increase in value. As they represent a significant restriction to a buyer, overage agreements require very careful drafting to ensure that the conditions are clear to both sides at the time of sale and that the agreement is ultimately enforceable.
When should I include an overage agreement in a sale?
Overage agreements are most commonly used in sales involving large plots of lands that have development potential. For instance, farmland at the outskirts of a town.
Change of use of the land from agricultural to residential or commercial property use and the planning permission process can be time-consuming and expensive. As a landowner, you may not have the time or inclination to take these steps before selling the land. You may require an injection of cash into your business now. However, changing the use of land in this way, and securing planning permission can increase the value of the land appreciably.
An overage agreement allows you to sell the land at the current market value but if, in the future, planning permission is granted and the price of the land increases, you are entitled to a payment that reflects a percentage of the increase in value. This obligation can be drafted so that it is not only binding on the buyer that you have sold the land to, but to subsequent owners as well.
How do you make sure you can enforce an overage agreement?
There are different types of overage. Take legal advice to consider which one will best secure your payment in the future. Most of the agreements will involve a positive obligation on the buyer to make the overage payment should the change in use occur. However, they generally also include a ‘stick’ to ensure that they do.
One way of ensuring payment is to place a restriction on the title. This means that the buyer is prevented from disposing of the land without the seller’s consent. The consent will only be granted following upon payment. This is the most common form of clawback clause.
Alternatively, a restrictive covenant is put in place, which restricts the buyer using the land in any other way apart from the purpose for which it was being used at the time of the sale. Therefore, if the buyer wanted to develop the land, he would require consent from the original seller. This would be granted once the overage payment was made.
Finally, some sellers prefer to ensure payment is made by keeping strips of land, which make it impossible for the buyer to develop the land without first purchasing them. These are commonly known as ransom strips, the land surrounds the plot, and the developer would be required to gain a right of access to them to complete the development. This is often not a cost-effective way of gaining further payment as it requires careful monitoring and very precise drafting of the agreement.
What should an overage agreement include?
Overage agreements are not straightforward, and you should always consult a solicitor to take you through the process. As a guide, however, here are some of the terms that you will have to consider to secure an enforceable deal.
How long will the overage agreement last?
This can be a set number of years and may depend on what you decide your trigger event for payment is.
What triggers payment?
Commonly the event that triggers payment is the sale of land following the grant of planning permission, although sometimes it is the implementation of planning permission or occasionally the award of it. How you define your trigger event is critical to securing the maximum payment and to preventing issues further down the line. For instance, if the trigger event is linked to the grant of planning permission, is that outline planning permission or detailed? What if it is awarded, but the conditions imposed by the planning department are not acceptable to the developer? A developer may make an initial planning application that only changes the value slightly, makes the overage payment based on that, and then reapplies. A carefully drafted agreement can cover multiple trigger events to avoid this situation.
A solicitor will be able to look at your particular set of circumstances and advise how to frame the trigger event to offer you the most protection.
How do you calculate an overage payment?
The overage payment will be expressed as a percentage of the uplift in value of the land. The percentage will be agreed between parties in the agreement. The percentage must be sufficient to justify the time and expense of drawing up an agreement. It could be in the region of 20 to 30%. How you then calculate the sum to be paid will depend on what you chose as your trigger event. If the trigger is the grant of planning permission (however that is defined), then the payment will be calculated based on the value of the land with planning permission less the value without it, and the percentage taken from that. If your trigger event is the sale, then the percentage would be taken of the profit.
While that seems straightforward, you and the seller should agree how you will value the land (should your trigger not be a sale), and what expenses the buyer is entitled to deduct before calculating the uplift. This will prevent disputes at a later date.
Are there tax implications?
If you decide that you want to use an overage agreement as part of your sale, then you also need to consider whether there are any tax implications. You should consult a tax expert, as there is likely to be Stamp Duty Land Tax implications.
What happens if the land is sold on with no grant of planning permission, or for no profit?
It is critical that your overage agreement applies not just to the buyer, but to successive buyers, notably if you have opted to have your agreement apply for a substantial period. The positive obligation in your overage agreement will not automatically pass with the title. To ensure that you do not miss out you, or your solicitor should consider what steps you can take to bind subsequent buyers. This might influence the type of agreement you decide to include in your contract.
When should you consult a solicitor?
There are so many possible ways to draft an overage agreement, and they can be fraught with risks to you and the buyer. This makes consulting a solicitor when you are contemplating selling land a priority. They, along with the help from a surveyor, will be able to help you establish whether your land has the potential to increase in value. Your land deal will be unique to you, as will what you wish to achieve by the inclusion of an overage agreement. A solicitor will guide you through the process to ensure that the agreement not only protects your interests now, but also in the future. Safeguarding you from the risks and ensuring that you still reap the rewards.