An overage clause is generally included in a commercial property/land sale contract and is used by the selling party for them to receive additional funds after the sale has been completed and an agreed ‘trigger event’ has taken place. The trigger event is generally an increased value of the property/land that occurs in the future.
Situations where an overage clause might be included in a contract
The typical circumstances where an overage clause is included in a contract is:
- Where there is an expectation that the property/land may be redeveloped; or
- That valuable planning permission may be granted in the future.
In other situations, certain sellers, such as public sector bodies and charities, may be required to sell the property/land at the best possible price that can be obtained and an overage clause can be included in the contract for this reason.
Overage clause trigger events
As mentioned before, an overage clause requires the buyer to make a further payment to the seller, representing a share of the increased value of the property/land after an agreed trigger event has taken place. This trigger event could be:
- The granting of planning permission for development or change of use;
- The implementation of planning permission;
- Disposal of the property/land with the benefit of planning permission;
- The early implementation of planning permission and disposal of the property/land with the benefit of that planning permission;
- Disposal of the property/land at a higher price within a fixed time period; or
- Disposal of the completed development.
Overage clauses enable the seller to sell at the current market value of the property/land without having to waive a share in the development potential of it when that is actually realised.
Situations where an overage clause might not be beneficial
Whilst overage provisions can be useful in some sale contracts, they might not be appropriate in all situations, such as:
- If the likelihood of the land/property being developed is remote, the cost of negotiating complex payment provisions can outweigh the chances of the overage payment ever being made.
- Overage provisions may also affect the purchase price that the buyer is willing to pay for the property/land at the outset.
- Where a buyer is purchasing property/land with the intention of redeveloping it straight away, it is generally preferable for the seller to grant the buyer an option or to enter into a conditional contract for the sale of it. Completion does not occur until after planning permission has been obtained and the purchase price can then be calculated based on the market value, using the actual planning permission that has been obtained.
Positive and negative overage clauses
Overage clauses are sometimes described as being either positive or negative.
- Positive overage methods involve the seller extracting an expressed promise from the buyer to make a further payment if a particular trigger event should take place in the future. How the payment will be calculated and the trigger event for payment will be carefully defined in advance.
- Negative overage clauses are where the seller imposes a restrictive covenant or another mechanism, such as a ransom strip, that prevents a particular development or change of use. The seller can then require the payment of the increased monies at a later date in return for the release of the covenant or the sale of the ransom strip.
Seek legal advice
As overage clauses usually reflect complex arrangements, it is always advisable to seek legal advice before it is included in a sale contract.
Getting the drafting right in the contract is made harder as the parties have to consider all reasonably foreseeable circumstances to ensure that the clause remains effective for the whole of the overage period.
There are also various ways in which overage obligations can be drafted and secured, and the most appropriate method should be chosen to suit the particular circumstances. Each method has its own advantages and disadvantages.
How can Nelsons help?
If you are involved in a commercial property/land transaction and would like advice with regards to overage clauses or any other related matters, please get in touch with Martin or another member of the team on 0800 024 1976 or via our online form.Contact us