Overage: ‘happy marriage’ or ‘excess baggage’?

‘Overage’ allows a seller of land to share in the potential future increase in value of the land that they have sold. Typically, a seller thinks at some stage in the future the land will increase in value, normally either triggered by the grant of a planning permission or by the buyer developing the land and gaining more from onward sales than it envisaged when it bought the land.

The trouble is that overage is a complicated arrangement and sellers, buyers and their respective agents can easily overlook some key issues when negotiating the point, possibly because it’s a final issue or afterthought.

Overlooked considerations can include how long the arrangement is to last, how it will be secured, what event(s) will trigger the payment(s), the amount of the payment and, crucially, whether it would actually be better to have a conditional contract or an option to purchase, rather than a straight sale with the possibility of a deferred payment in the future.

Work relating to overage includes not only negotiating the actual overage agreement – either as a standalone arrangement or as part of a sale contract or transfer – but also ‘after’ events such as advising as to whether or not an overage payment has been triggered, the calculation of the overage payment due and the negotiation of a release of overage, in return for a one-off payment or some other consideration.

Careful thought is needed before entering into an overage arrangement:

From the seller’s point of view

• An overage agreement is not something to be entered into lightly, and the seller bears the brunt of the difficulties. This is because they will have sold the land and obviously have some expectation of being able to share in its future value. However, no longer being the owner of the land, the seller often has no leverage or direct control.
• Of course, if the seller genuinely thinks that there is scope for development in the future, they might be better off obtaining the planning permission themselves.

From the buyer’s point of view

• The buyer needs to be concerned about the title to the property being encumbered by either a charge or other security arrangements, which might make it difficult for them to sell the property.
• The buyer must ensure that they comply fully with whatever has been agreed, in terms of keeping the seller informed of any planning applications, progress of the applications and outcomes. This may include providing full records of expenditure.

From both parties’ points of view

Overage arrangements are complicated and time-consuming and add significantly to the cost and time spent in negotiating the original sale. Therefore, both parties should seriously consider whether or not this is sensible and whether another arrangement would be more appropriate.

To conclude:

• Overage is a useful way of achieving a sale and deal between the parties and so, might be a “Happy Marriage”. However, the parties must accept that negotiations on the overage terms and arrangements may cause significant delay in concluding a sale and purchase, as well as additional cost.
• Since the parties are trying to deal with potential future events but without the benefit of a crystal ball, unforeseen issues can cause arguments between the parties in the future. So, it could be “Excess Baggage”!
• Notwithstanding the difficulties, if negotiated by experienced professionals, overage can be a useful way of getting deals done to the satisfaction of all the parties, which is, after all, by far and away the most important issue.

Alex Hutchings provides regular commentary on issues currently affecting real estate on LinkedIn: connect with him to see if you agree or disagree with his assessments of real estate’s problems and potential solutions.