Overage agreements if you are selling land for development

Are you selling land that you think the buyer might profitably develop but are not sure how to secure a share of the future development value?

If you are selling land that you think is ripe for development, overage (also known as a ‘clawback’) is one way that you can secure a share of the uplift in value should the buyer develop the land in the future.

Provided that overage is realistic i.e. there is a reasonable expectation that the land being sold will increase in value as a result of a trigger event, then an overage agreement will need to be put in place.

An overage agreement specifies that as part of the sale, the seller is entitled to a portion of any future financial increase in the value of the land being sold. For an overage agreement to be effective, there are lots of considerations and matters that need to be carefully negotiated between the parties.

It is important to note that overage agreements cannot be effective indefinitely, as such the parties will need to agree the period for which the overage will apply following the sale of the land.

As mentioned, the overage payment is usually triggered by a specified event, such as the grant of planning permission, disposal of the property with planning permission, completion of development or its sale as a whole or plots within it.

The parties will also need to determine a formula as to how the overage is to be calculated.

Whilst the overage agreement creates a contractual obligation on the buyer to pay the seller any overage which becomes due, this in itself is likely to be inadequate to the seller.  This is because the seller cannot be certain that the buyer may not have the financial capability to satisfy the payment or may even cease to exist at the point any overage is to be paid in the future. Therefore, it is recommended that a seller seeks to secure their right to any future overage payments against the land itself.

This is achieved by registering a restriction on the buyer’s title to the land, which prohibits the buyer from further selling the land unless their future purchaser also agrees to be bound by the overage. This can be completed by way of an application to HM Land Registry.

In addition, it is possible to register a legal charge over the land so, should the buyer dispose of the land, the buyer would be required to redeem the charge by paying the seller any overage due or ensure that the subsequent purchaser also enters into a charge to continue to protect the overage.

It is recommended that you obtain legal advice in relation to overage. This ensures that your objectives are carefully negotiated and reflected in the meticulous drafting of the overage agreement and, crucially, that your interest is sufficiently protected and secured. Should you have any queries or require advice, please contact the Commercial Property Team at Crombie Wilkinson Solicitors.