Published: 17/10/2021 By Tom Bloomfield
Overage agreements help maintain the supply of land, and buyers and lenders should view them in a more positive light.
The surge in residential development in the Eastern region in recent years means we are increasingly advising clients to negotiate overage clauses when selling land or properties with land. This is a trend that looks likely to continue, however, it is still common for buyers and lenders to push back on overage agreements, which some view as restrictive and potentially problematic.
I want to argue that overages are an elegant tool that keeps sale prices down and bolsters supply, and that when they are negotiated properly, they can benefit all the stakeholders in a transaction.
What is an Overage Agreement?
Overage agreements (which are sometimes known as clawback or uplift agreements) are normally imposed by land owners at the point of sale and entitle them to a proportion of any uplift in value that occurs after they relinquish ownership subject to trigger events such as a successful planning application made by the new owner.
Overages are normally applied to areas of land where the potential gains from planning are marginal or where a recent application was only narrowly rejected. We have negotiated agreements where the percentage of the uplift payable to the beneficiary has been as high as 50% and as low as 10%, but a 25% payment is more normal.
Typically, an overage agreement would last for between ten and fifty years (surviving any changes in ownership) and they are commonly used by local authorities, private land owners and private companies.
Weighing up Overage Agreements
The obvious advantage to a vendor in imposing overage is that he or she can sell in the short term whilst retaining a chance of a windfall gain in the long term. A secondary advantage is that they will not have to invest their funds into any planning application, with that burden fall entirely on the new owner.
The obvious disadvantage to a vendor is that they give up all control to the new owner who may pass over opportunities to develop the land in question or choose to wait-out the overage term.
The obvious downside for buyers is that if they successfully achieve planning, they have to give up some of the gains but the advantage is that by agreeing to give back part of any future gains, they get to avoid paying an inflated “hope value” price for the land in the short term.
A secondary and often-unnoticed advantage to buyers is that overages encourage vendors to sell land in the first instance, rather than holding onto it for its future potential. So, if you are a buyer weighing up an overage agreement on land that you hope to purchase, keep in mind that without the overage the land may not have been available at all.
We have been involved in numerous sales in recent years where the buyers have borrowed from a high-street mortgage lender to purchase land with an overage agreement in place, however, there are some lenders who still view such agreements as detrimental to the value of the property and many cases those companies will not lend.
This seems to be an illogical position for the lender, which we feel will readjust in time. Our view is that there is no practical way for a normal overage to reduce the value of land as it will only trigger in the event of an uplift; in the event of a successful planning application what lender would be disappointed to hear that land on which they hold a charge has increased in value?
Advice for Vendors
If you are selling land, either on its own or adjacent to a property you own and you wish to introduce an overage clause, try to make sure that the terms of the agreement are agreed with a buyer as part of the opening offer negotiations, rather than retrospectively; also make sure that the buyer has checked in advance that their lender is one of those who supports overages.
Also try to agree terms (the percentage uplift, the length of the agreement and the boundaries where the overage applies) at a level that does not disincentivise the new land owner from investing into a planning application in the future – after all, the purpose of an overage is not to stop future development but to create a win-win situation for all the stakeholders.
Advice for Buyers
If you are considering buying land where the vendor has requested an overage agreement which you are not enthusiastic about, then consider either negotiating the terms of the overage or offering a higher price for the land to incentivise the vendor to remove the clause entirely.
If you have land or a property with land where you would like advice on its planning potential and value or would like to discuss the terms of an overage clause in more detail then please contact me by email on firstname.lastname@example.org.