What Are Overage Clauses?
Overage is a property or land seller’s right to receive additional payment(s) from a buyer at a future date. That date is usually after the sale of the property or land to the buyer. The trigger for this right to receive payment is usually when some event happens or condition in the sale contract is satisfied. Overage is sometimes known as ‘clawback’ or ‘deferred consideration’ or ‘uplift’ or ‘kicker’.
Overage clauses can benefit both parties in a property sale and purchase transaction as it enables a seller to benefit from any uplift in the value of the property and for the buyer to defer payment until the trigger event. The latter could help hedge some of the risk in the project and aid with cash flow.
Some sellers, such as public bodies or charities have fiduciary obligations to ensure that any property sale is made at the best market value. The inclusion of an overage thus protects their compliance with their fiduciary duty, so that it acts to avoid embarrasment to the seller in the event the buyer sub-sells the property to turn a quick profit.
Common Trigger Events
The most common trigger events in overage clauses include:
- Grant or implementation of planning permission
- Completion of the property development project
- Sale of the whole or part of the property
The overage could be triggered multiple times, during the life of the overage period, for different trigger events.
It is important to bear in mind that overage payments are by no means certain or guaranteed. Bear in mind:
- the specified trigger event may not occur within the overage period
- the local planning authority’s development plan for the site or other circumstances surrounding the property may change over time
- even if the trigger events do occur, the buyer may simply fail to make the payment
- the buyer may become insolvent
Security for the Seller
Since overage is a form of credit given by the seller to the buyer in the form of deferred payment, it is important that the seller obtain some security to protect the right to receive that payment. This usually takes the form of a restriction registered on the title to the property which would require the consent of the seller before a transaction affecting the property could be registered with the land registry. Other forms of protection could include:
- A legal charge registered on the title to the property
- Restrictive covenant, registered on the title to the property
- A personal or parent company guarantee
- Ransom strip
Points to Consider during Negotiations
When negotiating the terms of the property transaction at the outset, it is important to be as clear as possible regarding the overage payment. Whilst each transaction is different and thus the overage will be bespoke to the transaction, here are some underlying terms to consider:
- whether an overage is even appropriate for the transaction? – it may make the deal unviable for the developer buyer. Remember the effort and (legal) costs to negotiate and agree an overage will be high – is it worth spending this effort and costs on something that may never crystallise?
- would a conditional contract for the sale of the property or an option agreement or promotion agreement be more appropriate?
- is it likely the overage will be triggered during the overage period?
- how long should the overage period be, given the circumstances?
TIP: Appreciate the fact that an overage arrangement will require a degree of supervision and administration by both parties. This leaves loose ends. The overage clause may oblige the buyer to produce accounts and report to the seller and both parties may need to be involved in any valuation procedures, which often results in disputes.
As an overage payment affecting property is essentially a further payment in respect of the property transaction, this triggers an obligation on the buyer to complete and submit a Stamp Duty Land Tax Return to HMRC and may result in a further Stamp Duty Land Tax liability, depending on the value of the overage payment. Likewise, the overage payment could trigger a Capital Gains Tax liability for the seller, unless an exemption applies. It is important to ensure such obligations are not missed by either party as the penalties and interest levied by HMRC could be severe.
About the Author
Tariq Mubarak is one of the top property solicitors in England, and he has helped hundreds of clients achieve success with their property goals.
Read more about Tariq’s background and his client’s successes.
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