July 15, 2022

What is overage and do you need it?

Specialist commercial solicitor, Laura Gale, discusses the use of overage clauses and the things you should look out for.

What is overage?

Overage provisions (synonymous with "clawback") are contractual in nature. In the context of a property transaction, they oblige a buyer to make further payment(s) to a seller after completion, if and when certain "trigger events" occur. Such provisions can be incorporated in the transfer deed, or an ancillary agreement can be prepared. Overage most commonly arises in transactions involving large sites, bare land, and land ripe for development.

Overage and mortgage lending

Overage is a useful tool, oftentimes for both landowners and developers. It is worth noting, however, that most high street residential lenders will not issue mortgage offers or lend against properties and land affected by overage. However, this does not preclude overage in residential transactions, and our specialist development and land solicitors are able to advise on potential workarounds.

Why should I consider an overage agreement?

As a landowner, particularly if you are a first time seller or feel less au fait with property transactions, you may be unaware of the development potential of your land. Without an overage agreement, there is a risk that you may sell your land at market value, and the buyer could then obtain planning permission, or further planning permission, build more units on the land than first anticipated, and/or obtain a change of use for the land. This would likely result in the land being a lot more valuable, and you would have no recourse or right to share in that uplift in value without an overage agreement.

If you are a public body disposing of land pursuant to the Local Government Act 1972 or a charity disposing pursuant to the Charities Act 2011, incorporating overage provisions can ensure compliance with statutory obligations to secure the best outcome or maximum profit. Further to this, particularly if you are in the public eye or answerable to a board, it can help avoid embarrassment if your buyer walks away with a large profit at your expense because overage was overlooked.

Overage clauses and agreements

Overage clauses may appeal to developers as they may be able to secure land at a lower initial price, instead of the purchase price being based on hypotheticals. Most overage agreements require positive action to instigate overage payments, meaning a developer will usually be in control of if, and when, further payments become due. However, careful drafting is required, as demonstrated by the case of Microdesign Group Limited v BDW Trading Limited. In Microdesign, the overage agreement was silent on who should apply for planning permission, and the benefitting party applied for planning permission themselves, in an attempt to induce overage payments.

Negotiating overage early on can help a transaction get underway more quickly. Instead of prolonged negotiations over matters regarding value, a base purchase price may be agreed with further payments then being determined by reference to a formula set out in the overage agreement.

Key terms regarding overage

When negotiating overage, some of the key terms to consider are:

(a) What the overage period will be, i.e., how long the overage provisions will apply for;
(b) What the trigger events will be; and
(c) How the overage payments will be calculated.

In relation to the overage period and overage payments in particular, we would always recommend seeking advice from a land agent or surveyor, who will be best placed to advise.

Trigger events for overage payments are usually incidents which increase the value of the land in question, or which incite some other financial benefit for the buyer.

The most common trigger events are:

  • the grant or implementation of planning permission, whether that be outline or detailed planning permission is a point for negotiation
  • practical completion of a development
  • the sale of new units built on the land
  • a subsequent sale of the same land (or part of it) at a higher value
  • development above and beyond that defined in the overage agreement

Securing and protecting overage

As above, overage is contractual and any failure by a buyer to make overage payments will constitute a breach of contract. However, a claim for breach of contract may prove fruitless if the developer has insufficient funds from which to pay damages. It is therefore advisable to protect overage interests in some way. Overage protection can be achieved in a number of ways, including:

(a) Ransom strips: some landowners seek to withhold a small, but crucial, strip of land from the initial sale, e.g., a strip required for gaining sufficient access, on the proviso that it will be released to the buyer on receipt of all overage payments. It is, however, worth bearing in mind that buyers with lenders will often be unwilling to proceed in this way, as a site with insufficient access rights and options will be unlikely to constitute good lending security.

(b) Legal charges: overage payments can be secured by way of legal charge (against the site in question, and/or other assets of the buyer) meaning the seller will retain an interest in the security site(s) until all overage payments are received in full and the legal charge is satisfied. Such security is usually advisable on high value matters, but may not be a viable option where the buyer is obtaining third-party finance to fund the purchase.

(c) Restrictive covenants: it may seem simple to include a restrictive covenant in the transfer deed, precluding a buyer from carrying out development on the site (the intention being that the seller then provides a release of covenant on receipt of further monies). However, a restrictive covenant can only be utilised where the seller is retaining nearby land which genuinely benefits from the restrictive covenant, as demonstrated in Cosmichome Ltd v Southampton City Council. If the benefit is purely financial, there is a risk that it may not be enforceable. Further, there is a risk that the buyer (or their successors) will apply to the Lands Tribunal to discharge or modify the covenant in future.

(d) Guarantee: particularly where the buyer is a newly incorporated and registered company, or an SPV company with little to no assets, a seller may opt to take a guarantee from directors of the purchasing company, or from a third party. It is worth bearing in mind that the strength of any guarantee will fluctuate from time to time, in line with the assets of the guarantor, and the guarantor may eventually cease to exist.

(e) Bonds: rarely, a buyer may be able to source a bond from a financial institution, giving a seller some assurance that the bond may be drawn upon in the event of a trigger event.

(f) Positive overage with a restriction: the most common way of securing overage is by placing a positive covenant on the buyer obliging them to comply with the terms of the overage agreement, coupled with a restriction on title. Such a restriction will prevent the buyer, or their successors, from selling the site, or parts of it, without first obtaining consent from the overage beneficiary. The title restriction will then be removed on receipt of all payments due.

How can Holmes & Hills LLP help?

The above is a summary only of overage and some of the key terms that should be paid consideration at negotiation stage. However, it should provide some indication of how complex overage can be and that there is never a "one size fits all" overage deed.

Overage is one of the most heavily litigated areas of real estate law and it is important for all that the drafting properly reflects the intentions of the parties and leaves no room for ambiguity or loopholes. To that end, it is always advisable to seek early advice, not only from a land agent/surveyor, but also from a specialist solicitor. If you would like advice or any further information about overage, please do not hesitate to contact our specialist Land and Development Team.

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Key Contact

Laura Gale

Senior Associate


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