What is an overage agreement?

What is overage?

An overage provision or agreement obliges a property buyer to pay additional money to the seller on top of the original purchase price when certain triggering events happen. For example, the trigger might be the grant of planning permission, increasing the land’s value. Invariably, overage agreements are time-limited for, say, ten or twenty years.

Many factors come into play in negotiating overage, but the primary point of contention is usually the precise terms of the triggering event. Common triggers include:

• A grant of planning permission.
• The implementation of planning permission.
• The sale or disposal of individual units on a development site.

Grant of planning permission

From a seller’s perspective, a grant of planning permission is preferable as this increases the prospect of a trigger date falling within the overage period. However, a buyer generally prefers a later trigger once the land’s value is more certain. Another consideration is that planning permissions are challengeable, so a preferable trigger might be the end of the period allowed for judicial review.

Also, will the buyer have sufficient funds available to pay the overage on the grant of planning permission? This problem is not uncommon, and a seller may find themselves obliged to accede the point and wait for payment.

Implementation of planning permission

Implementation of planning permission can seem more attractive to a buyer but can prove a problematic trigger if poorly drafted. A good example was the case of London & Ilford Ltd v Sovereign Property Holdings Ltd (2018). In that case, the buyer obtained planning permission for sixty flats. However, it was not possible to construct them all as that would have contravened building regulations. The Court of Appeal ultimately held that planning permission and building regulations were separate issues. And as the agreed trigger was the grant of planning permission without reference to building regulations, the buyer was required to pay the overage.

Sale or disposal of units

A potential problem with this trigger is precisely defining what constitutes a disposal. From a seller’s perspective, a broad definition is preferable. On the other hand, a buyer will want to keep the definition tight to be free to deal with the land in specific ways without triggering overage, for example, charging it as security to borrow money to fund the development.

Another consideration for the parties is that if the buyer is a company and the trigger is the disposal of the land, is overage triggered on the sale of the company?

Overage and mortgages

It’s worth remembering that most residential lenders will not offer a mortgage or otherwise lend against land subject to overage.

Conclusion

Overage can seem very attractive, but it’s crucial to get it right. Disputes are common, mainly where the terms of the agreement are not well defined, catering for all possible eventualities. Whether you are buying or selling, if overage is raised as a transaction condition, always contact us for specialist legal advice.