Real Estate Update: Overage Agreements – The Key Provisions Explained
27 March 2019
Overage is a contractual arrangement that allows a seller to receive additional payment from a buyer if the land increases in value in the future. We look at the key provisions in an overage agreement and recent UK case law which illustrates the pitfalls of imprecise drafting.
Overage agreements are complex. Care needs to be taken to ensure the agreement reflects the understanding of the parties and what was actually intended. The key provisions of an overage deed relate to the ‘trigger event’, the formula for calculating the uplift in value and protection for the seller.
The trigger events are usually events which cause the value of land to increase, e.g. grant of planning permission, re-zoning or completion and sale of a development. Once the trigger event occurs the buyer must pay to the seller the overage payment. The amount of overage payable is determined using a formula, which often refers in some way to the increase in market value. In addition the seller needs to ensure that adequate security is given to protect the future payment.
In a recent 2018 UK case, London and Ilford Ltd v Sovereign Property Limited, the trigger event was the grant of planning permission for 60 units. Permission was granted but it later transpired that not all 60 units could be constructed without breaching building regulations. The buyer argued that the overage was not payable because there was no commercially valuable benefit because the 60 units could not be built. The court concluded that the trigger event only concerned the change of use and not compliance with building regulations.
Overage payment formula
In the 2009 UK case, Chartbrook Ltd v Persimmon Homes Limited, the issue was whether the costs were to be deducted before or after the calculation of 23.4% of the amount determined by the remaining part of the formula. The difference of interpretation resulted in a difference of £3.5 million.
The most common means of protection is where the buyer gives a contractual commitment to make a future payment once the trigger event occurs and covenants to ensure that its successors in title will enter a similar commitment. Another method of security is where the buyer’s overage obligation is secured by the seller taking a legal charge over the property following completion. This option is not viable where the buyer has a lender.
Parties considering an overage agreement should consider whether the benefit to be gained is proportionate to the time and expense put into an overage regime. Parties should obtain advice from not only solicitors but also tax advisors, valuation experts and town planners. The parties and their advisors should prepare a list of issues and agree terms to resolve them. The problems highlighted by the UK case law set out above can be overcome if a comprehensive checklist of issues is identified at an early stage in the process.
For more information on overage agreements or further consideration clauses, 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.