‘The buyer will pay the seller additional sums if planning permission is obtained for the property’.
Statements such as this are frequently added at the end of Heads of Terms for the sale of a property. These phrases, glibly added by agents intending to ensure a greater return for their seller clients, can be a challenge to real estate lawyers as any ‘overage’ arrangement may lead to a lot of time, concern and money being spent on the issue.
‘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
From the buyer’s point of view
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.
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.
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