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Publish date

28 April 2022

A guide to overage agreements

When discussing the sale or purchase of a site for development with a client we are often told that an “overage” has been agreed.  Overage is generally agreed when the parties to a transaction think that the planning position in relation to the site can be improved or the buyer has the potential to make more money from the development.  It is often used to “sweeten” the deal and give a particular buyer an edge over another buyer. Whatever the reason there is a lot to think about when agreeing an overage.

Key considerations when entering into an overage agreement

The overage must last for a fixed period of time.  A seller will obviously want the overage to last for as long as possible whereas a buyer will want to keep it short.  The length agreed will very much depend upon the bargaining power of the parties and the likelihood of any future development.

Overage can be triggered by various different circumstances, for example, the grant of planning permission for additional development or by reaching an agreed threshold for sales receipts from completed units built on a site. It can also be triggered by a buyer re-selling a site for an enhanced sale price within a short period of time following completion – this is known as an anti-embarrassment overage.

Where overage is linked to the grant of planning permission it is important to ensure that the provisions allow for the judicial review period to have expired so that a developer does not have to pay overage in respect of a planning permission that is later quashed.

Overage can be linked to the disposal of a site with the benefit of planning permission.  In these circumstances it is important to ensure that not all disposals trigger payment of the overage.  For example transferring part of the site to an electricity provider for housing a substation should not trigger payment of overage by the developer.

Calculating the amount of overage

The formula for calculating the amount of overage that is payable must be carefully considered and set out in the agreement.  It should be kept as simple as possible and it can be helpful to include a worked example in the agreement.

The seller will want to ensure that the obligation to pay overage is properly protected.  This can be done by way of a restriction being registered against the title to the property at the Land Registry that will prevent any disposal of the site without complying with the terms of the overage agreement.  It is possible to secure overage by way of a legal charge but this can cause problems for a developer with funding and is therefore best avoided.

It is important to remember that any agreement to pay overage on a future date or time agreed will be subject to SDLT.  SDLT is payable within 14 days of completion of the initial purchase and of course at completion the amount of overage or the date on which it may be payable is not likely to be known.  It is also possible that the trigger will never occur meaning the overage never has to be paid.  It is therefore possible to apply for deferral of the SDLT so that it does not have to be paid to HMRC until the overage payment itself is actually paid.  There are strict rules governing deferral of SDLT which must be followed.

Overage isn’t simple and must be carefully considered at the start of a transaction.

This article first appeared in Propertywire.

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