Overage Provisions – Something to get your claws into?

Insights - 15/05/2019

Cathryn Pernstich, a Senior Associate in our Commercial Property Team, looks at points to consider when putting overage into place.

Overage (or clawback as it used to be called) is something that can be attractive to a seller and/or a buyer.  It can lead to a higher eventual gain for a seller and assist a buyer in delaying the payment of a higher purchase price (if at all). Whether or not to include overage provisions in a transaction depends very much on the property market, the parties and the land in question.  It is not necessarily for the faint hearted as it can be complex, lengthy and costly to negotiate.

Whilst not an exhaustive list, below are some things to think about when considering whether or not to add overage to a transaction:

  • Length of time – how long will the possibility of paying overage last? 1 year, 5 years, 30 years?  There is no hard and fast rule.  It very much depends on the parties to the transaction and the land in question.  If there is a possibility of planning permission being obtained quickly, then a shorter period may suffice.  If the possibility of obtaining planning permission is speculative or slim, then a longer period will be attractive – particularly to a seller.
  • How much – again, there is no hard and fast rule. The buoyancy of the market and the likelihood of planning permission being obtained will be factors.  It might be described as a fixed sum amount or a percentage of the value realised.
  • Multiple bites of the cherry – an overage payment might be a one-off payment on a certain act happening or might become payable each time that act happens. Whether or not multiple payments can be agreed will take into consideration factors such as the area of land involved – if the area is such that several planning permissions intensifying use could be obtained then multiple payment opportunities might be more realistic. Alternatively, if it is a smaller area of land where only one planning opportunity might arise, it might attract a one-off payment.
  • What triggers an overage payment – there are many possible triggers and they might include:
    • the sale of land to a third party;
    • grant of a planning permission for a specified use – housing, offices;
    • the implementation of a planning permission obtained.

What is chosen as a trigger date will impact on a seller and a buyer differently.

If we take redevelopment of the land for housing as an example:

  • a seller would want the grant of a planning permission as the payment trigger rather than the implementation of the planning permission. Implementation may never happen, so no payment is received.  Implementation may not take place for some time, so payment would be made later.  Payment on grant is, therefore, sooner.
  • conversely, a buyer would probably want implementation of the planning permission as the trigger for payment. Until implementation the buyer’s cash flow is likely to be less than at the time of grant when revenue from potential sales is more likely to be forthcoming.  A planning permission may never be implemented so overage would never be payable.

How does a seller protect is right to payment – in an ideal world a seller would take a charge over the land affected by the overage once it is sold. Often, however, this is resisted as it can cause difficulties with any lender that the buyer is borrowing from to fund the purchase of the land.  That lender will want a first charge and not want to run the risk of the seller enforcing its right to sell under any charge it might have.

More often than not, the seller’s interest in the overage payment is protected by a restriction.  This acts as a block on a further sale of or dealing with the land in the future.

As can be seen, the matter of overage is not a simple one.  It has many facets and can take a number of twists and turns.  With recent transactions dealt with by Morrisons including overage provisions, it does seem to be coming to the fore again as a bargaining tool.

If you have any questions or would like to discuss any of the issues raised in this blog, please feel free to contact Cathryn Pernstich, Senior Associate Solicitor within our Commercial Property team. Cathryn is contactable by telephone on 01737 854 521 or by email on [email protected] 

Disclaimer:

Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.