What is overage and when should a seller consider selling their property subject to an obligation on a buyer to pay overage in the future?
What is overage?
Overage is a payment which is usually payable if certain trigger events occur after a property has been sold. If overage obligations apply and a trigger event occurs, then a buyer would have to make an overage payment to the seller. This payment would usually equate to a percentage share of the increased value of the property in question resulting from the trigger event having taken place.
What could the trigger events be?
The main trigger events are the following, but this isn’t an exhaustive list:
- the grant of planning permission for development or a change of use;
- disposing of the property with the benefit of a planning permission; or
- the implementation of an existing planning permission.
When would a seller impose an overage obligation upon a buyer?
A seller would usually try to impose an overage obligation upon a buyer where there is a reasonable prospect of the buyer redeveloping the property or obtaining planning permission which may increase the property’s value in the future. The overage obligation ensures that the seller is able to benefit from any increase in the market value of the property which occurs after the seller has sold the property to the buyer.
An example of a situation where overage may be appropriate is where a seller sells a property comprising a building which has a large amount of bare land around it which might potentially be developed in the future and thus the future market value of the property increased.
An overage provision can also act as an anti-embarrassment clause where the seller wants to protect against the buyer re-selling the property at a significant profit in a short period of time after the sale takes place.
What to consider?
Negotiating and drafting an overage agreement can be complicated and so the parties should seek legal advice as to the specific terms and required drafting. In particular the parties should consider:
- What is the trigger event?
- How long is the overage period to last and can it be extended?
- Does the overage relate to all or only certain parts of the property?
- Does the overage apply to only the first trigger event to occur or will subsequent trigger events result in further overage payable?
- What will be payable and when? If the overage calculation isn’t straightforward then it may be a good idea to include worked examples within the overage agreement.
- Should certain events which otherwise would constitute trigger events be excluded from the remit of the overage (for instance, development of the property for certain types of uses such as agricultural or equestrian).
- How the overage obligations are to be protected and enforced in the future and whether the obligations are to remain personals to the original buyer and seller or else pass to successors in title of the property.
If you’re considering whether you should impose an overage obligation and would like guidance, please don’t hesitate to contact our Commercial Property team.