Overage, clawback and uplift are all terms that describe the same thing. They refer to additional payments made to the seller after the land has been sold.
How can this happen? The landowner sells their land for its current value and agrees overage provisions with the Buyer. These provisions should be included in any contract where the land being sold is likely to increase in value. This could be due to planning permission being obtained by the Buyer or it being combined with other plots in the area and sold to a developer for a healthy profit. These type of events would trigger an overage or uplift payment from the Buyer to the Seller. They are commonly referred to as “trigger events”.
With overage provisions in place, the Buyer is obliged, when a trigger event occurs, to pay the Seller a percentage of the increase in the value of the land. This is often referred to as an uplift payment – as the value of the land has been uplifted.
It is important that the terms of calculating any uplift or overage payments are well-drafted so that both parties understand how much needs to be paid and when.
Overage is a complex area of law but this simple guide gives you an overview. It is important that you have some understanding of overage before buying or selling land.
Whether you are a Buyer or Seller, you should seek legal advice in this area.
- The Buyer needs to be fully aware of the terms of the overage provisions and also understand the effect this may have on their use of the land. For example, the Seller usually imposes a restriction on the Title to the Property so that it cannot be disposed of (e.g. sold, leased or otherwise) without their consent.
- The Seller, for example, must know which expenses the Buyer can deduct when calculating the increase in the value of the property.
There are various other issues that you will need to agree and document, some of which are covered below. This article covers:
- Key Takeaway Points
- What are the Different Types of Overage?
- How do You Calculate Overage/ Uplift Payments?
- When is Overage Due to be Paid?
- How to Secure the Payments
- Possible Issues
- Why Else?
Key Takeaway Points
- There are 3 different types of overage provisions that can be included in a contract or agreement which determine the way the uplift payment is secured. Any provision needs to be negotiated, agreed and then well-drafted and reviewed by both parties.
- Overage is usually calculated as a percentage of the uplift. The uplift can be the profit made by selling or by the increased value of the land due to planning permission being granted.
- The key points to agree on uplift payments are:
a. How the value of land with planning permission will be assessed when determining the uplift;
b. What expenses the buyer can deduct from the uplift caused by the granting of planning permission or profit made on the sale;
c. The percentage of the uplift to be paid (or the formula which will determine it in the case of large developments);
d. How long the overage provisions should continue to affect the land.
- You must carefully agree and define the event or events which trigger(s) the overage payment. For example, the Seller will possibly want the trigger to be when planning permission is granted – but should this be outline or detailed planning permission? What happens if the planning permission has so many conditions that the developer no longer wants to build?
- There are numerous other considerations that need to be agreed such as how the overage obligation is transferred to future buyers? If the overage is paid, does it then fall away or does it remain in place for the length of the term and cover numerous trigger events? A landowner may want numerous bites of the cherry, however a buyer will obviously want to limit the impact of any overage provisions on their proposed development.
Overage is a complex part of the law and we highly recommend that you seek the advice of a commercial property solicitor with experience in this area.
What are the Different Types of Overage?
There are three different types of provision that can be made in the contract paperwork. These are:
- A positive covenant (agreement) by the Buyer to pay overage coupled with a restriction on the title of the property. This is the most common form of overage. It prevents the buyer from disposing of the land without the consent of the Seller. The Buyer must make any overage payment to acquire their consent.
- A restrictive covenant which stops the Buyer from using the land for any other purpose than that at the time of purchase. So, if the Buyer wanted to develop the land for higher value use (for example build apartments on an allotment), then the Seller would need to give their consent which requires an uplift payment. However, these covenants are difficult to enforce without additional security and the Seller must retain some land which benefits from the restrictive covenant.
- The Seller retains strips of land (called ransom strips). The Seller can choose to retain ownership of a strip or strips of land surrounding the plot. The idea is that the Buyer would need to be granted right of way by the Seller to access any future developments. However, this requires the land to be monitored and, without a clear arrangement, overage payments may not be protected.
It is important when considering overage that your legal representative either drafts the provisions or reviews the provisions in detail so that both the Seller and the Buyer know exactly where they stand.
How do You Calculate Overage/Uplift Payments?
Overage payments are usually a percentage of the uplift in the value of land derived from an event – usually a grant of planning permission or the sale of the land at a profit. The calculation is different in these two cases:
1. If the uplift is due to a grant of planning permission, then the overage payment is often based on:
Property value with planning permission – Property value without it
In this way, the natural or inflationary increases are retained by the Buyer but the Seller shares in the uplift created by the grant of planning permission.
2. If the land is sold, then the overage payment is calculated on the profit made by the Seller.
The Buyer and Seller must agree:
- How the value of the property will be assessed (in case 1). You need to cooperate in agreeing the valuation of the land. It is essential to include a dispute resolution clause in case you can’t reach agreement. This could be to use an independent surveyor to calculate the increase in land value.
- The expenses that the Buyer can deduct when calculating the uplift. The Buyer will incur costs in realising the increased value and it is reasonable that they deduct legitimate expenses. You both need to agree what counts as a legitimate expense. Again, a dispute clause is useful and this could be having an independent accountant review the Buyer’s expenditure and accounts.
- How long the overage provisions remain in place – how long after the land is sold does the Buyer (or future purchasers) have to pay an overage charge.
- The overage percentage to be paid*.
*On large developments where numerous factors are involved, a formula may be used to calculate the overage payment. This needs to be carefully reviewed and should be used successfully with trial figures before the contract is signed.
When is Overage Due to be Paid?
Overage payment is due when a trigger event occurs. It is important that this trigger event is carefully drafted. For example:
- A Seller may want the trigger event to be a grant of planning permission or change of use. The Buyer would prefer the trigger to be when the development starts. The trigger event needs to be agreed along with the definition of “planning permission”. Does this refer to outline or detailed planning permission? What happens if planning permission is granted but the terms are unacceptable to the developer?
- At what point when the Buyer sells the land is the overage payment triggered?
- What happens if the property is disposed of with the benefit of new planning permission? A Seller would want to include a grant of a lease. This means that the Buyer needs to get permission from the Seller to lease the land or property. This prevents the Buyer from escaping the overage payment by giving a long lease, at a premium, to a new tenant who carries out the construction.
- Once the overage payment has been made should it fall away or does it remain for the length of the agreed period and apply to multiple events? A developer will resist this but the Seller will want to ensure that they don’t lose out. A developer could make an initial planning application which changes the value of the land slightly. They then pay the overage based on a small uplift before making a much more valuable planning application.
It is important that the trigger event is agreed and well-drafted to prevent later issues.
How to Secure Overage Payments
Sellers need to ensure that overage obligations apply to successive buyers where the overage provisions apply for a considerable length of time, to protect their position. If not, it would be simple for the original Buyer to sell the land for no profit to another company they own and so avoid the need to make an overage payment.
However, a positive obligation to pay a sum of money does not automatically run with the land. There are various options to ensure that the overage obligation is binding on later buyers. These include:
- The Seller takes a legal charge over the land which limits what the Buyer can do with the property. This isn’t always practical as a future buyer may need their own mortgage to purchase or develop and the bank may not lend against land that already has a legal charge on it.
- The Seller grants the Buyer a leasehold interest at no rent rather than selling the freehold. The Buyer’s positive obligation to pay the overage would be a tenant covenant, enforceable against successive tenants under the lease. However, a leasehold tenure is not as an attractive proposition as a freehold.
- The Seller may choose to reserve ransom strips, giving the Buyer the option to purchase these ransom strips on payment of the overage.
- Restrictions will always be placed on the title of the property. This means that the Buyer cannot dispose of it without the Seller’s consent. Consent would only be granted upon payment of the required overage or the new buyer agreeing with the Seller to comply with the overage terms.
There are numerous issues which can arise around overage. For example:
- What happens if the Buyer’s development company is taken over by another company?
- What happens if the Seller cannot be found when the Buyer wants their approval to sell the land?
- What happens if the Seller dies? Is the overage cover passed on as part of their estate? What happens if the probate is in dispute when the Buyer wants to sell?
These and many similar issues can be avoided by a well-drafted contract constructed by an experienced and knowledgeable solicitor.
Else is a modern, dynamic and forward thinking solicitors who have the expertise you expect from a large, traditional law firm.
You will discover that we are different to other legal firms. We will help you sort out your situation and then look at other ways that we can add value to your company. This could include introducing you to new customers or suppliers in our extensive network or offering you some new insight into your market or your business.
If you are buying or selling land, then you are invited to call our Commercial Property team on 01283 526 200.