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Don’t let Overage catch you out!

12 Dec 2013

Overage can be a future blessing, but because of its increasing complexity it can also cause problems for buyers and sellers of property.

Overage (also called “claw back”) is a sum of money over and above the original sale price that a seller of land may be entitled to receive following a completion of the sale, if a certain event takes place. For example, a farmer may sell a piece of land to a developer who is likely to obtain planning permission for offices.

However, the farmer may be anxious that once the sale has taken place the developer will acquire planning permission for houses to increase the site’s profitability. The parties may agree that a certain price will be paid on completion, but if the developer gets planning permission for residential use within a specified number of years the seller will receive more money.

Overages often seem the perfect solution to persuade a reluctant landowner to part with his property. In practice, however, overages can cause problems. The inclusion of an overage can lengthen negotiations and the time taken to move towards exchange. The application of overages can also lead to disputes.

Costly mistake

Because overage provisions are now pretty complex contracts, many people think that if an obvious mistake is made you can always get the contract rectified. However, the case of George Wimpey UK Limited –v- V.I. Construction Limited shows that this is a false hope. Wimpey’s had to hand over £800,000 to VI Construction as further overage because of an omission in its documentation.

The case painfully illustrates the need to rigorously test the overage formulae by worked examples in sale and purchase contracts, and never to leave all the negotiation to one person.

When negotiating overage, consideration should also be given to triggers. The triggers will determine when the overage payment will be made. Some common triggers are:-

  • Grant of planning permission
  • Completion of a development
  • The construction of more than a specified amount of development (houses, etc)

Timescale

The obligation to pay overage can be drafted in such a way that it will carry on for many years. A developer will not want the land to be bound by the overage for longer than necessary and will try to cover all eventualities that may occur. It may be that an overage is to be released when the land has been fully developed. If so, what happens if part of the land is not developed?

Sellers are often nervous about accepting time limits on overages since developers can use these limits to avoid paying them. They may sit on the property as part of their land bank and only apply for planning permission after the time limit expires.

When negotiating the lifespan of the overage provisions a balance needs to be struck between protecting the seller and not restricting the buyer for too long a period. If too short then there is a danger that the buyer will retain the land until the overage provisions have expired. However, the longer the arrangements last, the more burdensome they become.

The types of overage can include:-

  • Habitable room formulas
  • Developable area formulas
  • Sums dependent on the use for which planning permission is obtained
  • Sums that vary according to the levels of profit made by the developer

Test the draft

As a seller you will want to make sure that you have thought of every possibility and covered all eventualities to ensure that you do not lose out on future payments. As a buyer you will want to try and control the circumstances in which an overage is payable to specific time-limited circumstances so the land is free of the overage obligation as soon as possible.

Overage can be a useful device for both buyers and sellers, allowing transactions to proceed on terms that are commercially acceptable to both parties, when present circumstances make it less than perfect for one of the parties.

Because of the overage’s commercial significance it is likely to be negotiated early on in the life of a transaction. Once it has survived to the later editions of the draft contract there can be a tendency not to question it. People assume that it must be correct and that testing of it has already taken place. As the Wimpey case shows, no-one should assume anything – least of all with overage contracts.

For further information please contact Richard Freeman-Wallace on 0191 232 8345 or email: richard.freeman-wallace@hay-kilner.co.uk