What is an overage agreement?
An overage agreement, also known as a clawback agreement, is a contract often used in real estate transactions. It allows a seller to receive an additional sum of money from the buyer if certain events or triggers are met, for example, obtaining planning permission for development.
What are the types of overage agreements?
Planning overage
Planning overage is one of the most used types of overage agreements. This is where the buyer plans to develop the property in the future and is triggered in situations where the planning position of the property alters.
This type of agreement is usually used in property transactions where there is potential future development. The agreement is beneficial to the seller to capitalise on the potential future development of the land, as if the land increases in value because of the planning permission, then the seller will receive additional payments.
However, this type of agreement also benefits the buyer as they will only have to pay the overage if the agreed conditions, for example, grant of planning permission, are met.
Sales overage
Sale overage is where the contract allows the seller to get a share of the buyer’s profits when the property has been developed and then sold. This type of agreement is often used where residential development is carried out, and they are triggered on each plot sale.
Turn overage
Another type of overage is turn overage which means the seller of a property agrees to gain a percentage of the uplift in value of the property, regardless of whether the buyer chooses to improve its value.
It’s important to note that these types of overages are often granted for a shorter period of time.
What are the benefits of an overage agreement?
Both parties can benefit from an overage agreement. Examples include:
1. Increasing landowner’s profit
For a developer or landowner, an overage agreement grants the opportunity to take part in any future increase in the property value.
For example, if the trigger event specified in the agreement happens and the property’s value exceeds the agreed-upon threshold, this means the landowner can gain an additional payment, thereby increasing their profit from the transaction.
2. Sharing development risk
When obtaining planning permission or completing development the overage agreement means developers share the risk. If the developer invests time and resources in obtaining planning permission or completing development, the landowner shares in the potential upside by receiving an overage payment if the property value increases due to this.
3. Incentivising collaboration
Overage agreements can incentivise collaboration between landowners and developers. The landowner may be more prone to work closely with the developer to secure planning permission or support the development process if there is an opportunity to benefit financially from the resulting increase in property value.
4. Flexibility
This type of agreements can offer flexibility in structuring financial arrangements. Both parties can negotiate the trigger event, the threshold, and the calculation method for the overage payment. The benefit of this is it allows for customised agreements that fit the specific needs and objectives of both parties.
5. Win-win outcome for both sides
Overage agreements can create a mutually beneficial arrangement for both the developer and the landowner. The landowner gains the opportunity to benefit from increased property value, while the developer has a potential financial incentive to invest in the development process and maximise the property’s value.
6. Protection
Overage agreements can provide certain protections for buyers, such as being able to ensure the agreement outlines that the buyer only pays the overage if certain conditions are met, i.e.planning permission is obtained.
Overage clause loopholes to be aware of
When agreeing to overage clauses there are loopholes to be aware of, such as:
- A developer gains planning permission for a smaller development which essentially triggers the overage and then when there are no obligations under the overage agreement, the developer then gets planning permission for a much bigger project.
- During the overage period, the developer does not make any effort to promote and or sell the development.
- The buyer transfers the property to a group company or SPV at low value to avoid the overage and the group company buys the property free of the overage meaning the buyer can do what they wish with the property and have no obligations.
However, there are steps that can be taken to help mitigate these risks.
Seek legal assistance
In a real estate transaction, overage agreements can be useful, however, they are usually complex and highly individual to the specific circumstances of the deal. This is why each party should obtain legal advice to ensure that the agreement reflects their best interests.
How can we help?
Kieron Crowther is a Partner in our expert Commercial Property team. Kieron has particular expertise in land acquisition and disposal, commercial developments and commercial renewable energy and development work.
Our team have many years of experience advising property/landowners looking to maximise the value of their land/property and developers seeking to explore the viability of a project prior to them committing to the purchase. In addition to overage agreements, we can also advise on alternative contract options, such as conditional contracts, option agreements, and pre-emption agreements.
If you require any advice in relation to the subjects discussed in this article, please do not hesitate to contact Kieron or another member of the team in Derby, Leicester, or Nottingham on 0800 024 1976 or via our online enquiry form.
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