Real Estate Update: For Your Consideration – Can Overage Clauses Protect Sellers?
05 March 2019
The prospect of a purchaser making a substantial uplift on a further sale of a property within a short period following completion will not generally be palatable to a seller. Landowners considering the sale of a substantial or valuable asset should consider whether an anti-embarrassment clause could be used to ensure it can share in a potential future uplift in the value of the property.
How an anti-embarrassment clause works
An anti-embarrassment clause is in plain terms, a seller's right to share in any future increase in the value of a property. The clause works on the basis that an agreed additional consideration will be paid to the seller in the event that a specified event, or trigger, occurs within an agreed period. The trigger is often the disposal of all or part of the property, but could, for example, be the securing of a grant of planning permission or rezoning of the property. The additional consideration is generally a proportion of the uplift in value, based on the consideration payable or the market value.
When to use an anti-embarrassment clause
An anti-embarrassment clause, which may also be described as a further consideration clause, or an overage deed, is worth considering in the following circumstances in particular:
- Where a property is being sold off-market or after limited marketing
- Where the property is undeveloped and the securing of a favourable grant of planning permission or change in zoning could result in a material increase in the value of the property, or
- Where a seller is uncertain as to the market value, perhaps due to market conditions, and wants to ensure that it shares in any future uplift in the value of the property
What to consider – anti-avoidance in the context of an anti-embarrassment clause
The key commercial terms to be agreed in the context of an anti-embarrassment clause are:
- The additional consideration
- The applicable period
- The trigger, and
- How the clause will be enforced
The mechanics of how the clause will work in practice, anti-avoidance provisions and dispute resolution provisions are also important.
An anti-embarrassment clause often includes an obligation on the purchaser to provide all necessary information to the seller to enable it to identify when a trigger occurs and calculate the additional consideration payable. To prevent costly litigation arising from a dispute regarding the interpretation or application of an anti-embarrassment clause, it may beneficial to include a dispute resolution provision.
Before selling a property, a seller should consider whether an anti-embarrassment clause or overage deed should be included to secure a share in any future uplift in the value of the property. Careful consideration should be given to the drafting of an overage deed. In particular, it should clarify the events that will trigger the application of the anti-embarrassment clause, the means of calculating the sum to be paid to the seller if it is triggered, how it will work in practice and how it will be enforced.
For more information on anti-embarrassment or further consideration clauses please contact a member of our Real Estate team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.