Rural landowners who are contemplating the sale of land often ask if there is a way they can benefit from any increase in the value of the land after they have sold it, particularly where it is reasonably expected that a planning permission to redevelop or change its use and increase its value will arise after its sale. The question most often arises when landowners are approached by developers who wish to acquire the land for residential or other development.
The simplest way for a landowner to benefit from a future increase in value is to enter into an ‘overage agreement’ with the developer when selling the land. An overage agreement will require the developer to make a further payment (known as “overage” or “clawback”) to the landowner, representing a share of the increase in value, after the occurrence of one or more agreed “trigger events” within an agreed “overage period”.
The most common trigger events are the grant of planning permission for development of the land (or the grant of a more valuable planning permission than existed when the land was sold), the implementation of planning permission or the future sale of the land with the benefit of planning permission. Trigger events do not though have to be linked to planning permission and are limited only by the parties’ imaginations. They could be as simple as the future sale of the land or more complicated, such as the construction of living space above a pre-agreed threshold. Overage agreements can also allow for the trigger multiple times.
The trigger events, overage period and amount or method of calculating the overage can be whatever the parties agree. There are usually commercial considerations to take into account, such as the type of land, the area in which it is located, how marketable it is and the relative bargaining strengths of the parties. Parties that are proposing to enter into overage obligations would be well advised to seek the advice and negotiating skills of an appropriately qualified land agent with regard to the commercial terms.
A solicitor’s role is to draft an overage agreement based on the terms agreed and to make sure the seller’s entitlement to receive overage is protected. There are various means of seeking to protect an entitlement to overage, some depending on whether a seller will be retaining land. The most common means is to register a restriction against the buyer’s title to the land at the Land Registry. This prevents the Land Registry from registering a sale or other disposition of the land by the buyer without compliance with the terms of the overage agreement.
Sellers of land should not regard receipt of overage as guaranteed. There is no certainty that a trigger event will arise. Buyers of land will inevitably wish to avoid paying overage and seek to find a way out of doing so. This is not helped by the fact that overage arrangements can be complex and seek to anticipate future events. It is important to obtain advice from an experienced solicitor as to the drafting of any overage agreement once commercial terms are agreed.
Finally, overage provisions are not appropriate in all situations. If the likelihood of land being developed is remote, the cost of negotiating complex payment provisions can be outweighed by the chances of an overage payment being made. Further, overage provisions may affect the purchase price that a buyer is willing to pay for land in the first place.
The expert lawyers in our Rural team are well placed to advise on overage arrangements. Please contact Chris Anderson, or call 0191 232 8345 for more information.