Overage in property sales
Overage (sometimes referred to as ‘clawback’ or ‘uplift’) is an agreement between the buyer of a property and the seller that under certain circumstances, additional payment may be made to the seller after the sale has been completed as a consequence of the property increasing in value. Such circumstances generally relate to the granting of new or additional planning permissions, for example:
- The granting of planning permission for more intensive development of a site than was envisaged at the time of the sale.
- The granting of detailed permission for more intensive development than was permitted in a previous outline permission.
- The granting of permission for the demolition of an existing property and redevelopment of the land.
- The granting of permission for change of use.
Other circumstances might include:
- Development costs being lower than expected, for example where decontamination of a site is required
- A sale being necessary at a low point in the market.
These agreements are a means of sharing the risk and potential benefits of the future value of property between the buyer and the seller at a time when there may be some uncertainty, but where both parties wish to complete the transaction.
This is particularly common on residential plots where there is often uncertainty about the density of development that will be achieved, and so the parties might agree to share additional sales revenue beyond a base figure agreed at the time of the sale. Overage agreements might also be made with mezzanine lenders who finance the gap between the costs of development and limited recourse loans.
The exact nature, circumstances and duration of overage agreements will depend on the particular arrangements that the parties agree to, but they may not last more than eighty years. Agreements may be positive, with an agreement to additional payment under certain circumstances, or negative, with certain development requiring the consent of the seller.
Overage may become payable on completion of the development, on the granting or implementation of planning permission, or on the re-sale or leasing of the property. It is important that this trigger point is set so that the original buyer is not able to continually delay the payment, for example by not ‘completing’ the development.
Agreements may be enforced on future owners, either by making restrictions on the title to the property requiring future owners to enter into a deed of covenant, or by imposing a charge on the property.
Overage agreements might influence the willingness of lenders to lend against a property, and can cause delays in future sales, which take place many years after the original agreement was made.
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