It has become mainstream for sellers to use overage, a mechanism whereby a future event undertaken (in respect of the land sold) by a buyer triggers an additional payment to a seller, as this helps to ensure best value on a sale of their property. With the use of overage becoming common place over the last few decades, it is no longer unusual to encounter land which is subject to existing overage provisions. These are our top tips when dealing with land subject to existing overage provisions.
- Check whether the overage can be triggered only once or whether multiple trigger events can occur during the overage period – where multiple events can trigger the overage the seller will want an indemnity from the buyer or will need to ensure that the overage contains provisions allowing them to divest themselves from liability following the sale of the property;
- If the overage is capable of being triggered multiple times, where the buyer is looking to redevelop the property, a detailed review of the list of exempt disposals should be undertaken to ensure that plot sales, transfers to management companies and any necessary easements (for example) do not trigger the overage and/or require the transferee to sign up to the overage provisions;
- If there is planning overage, the liability to pay the original seller is generally only triggered on implementation of a planning permission or on a sale of the property with the benefit of a planning permission. You should review the actions the seller must undertake where planning permission is granted, these often require substantial evidential and calculation obligations to be undertaken and delivered to the original seller in order to agree or determine any overage payment due. The seller should ensure that its buyer is under an obligation to assist them in complying with these obligations and the buyer will want to ensure that the seller properly complies with these obligations so that ultimately the original seller cannot refuse to issue a certificate confirming compliance or any consent required to comply with any restriction on title protecting the overage. There are of course other kinds of overage not linked to planning but this principle requiring cooperation between the seller and its buyer applies across the board;
- The buyer should ensure that the seller’s solicitors provide them with a solicitor’s undertaking (subject always to completion of the acquisition of the property and receipt of the price paid) to pay the overage payment due to the original seller out of the completion monies. An undertaking from the seller’s solicitors to deliver the buyer’s duly executed deed of covenant (required by the restriction on the title protecting the overage) to the original seller should also be obtained to ensure that the buyer can register its acquisition at the Land Registry; and
- Finally, where the overage payment is not a fixed amount and is to be agreed or determined between the seller and the original seller (i.e. overage based on market value), the buyer and the seller should agree that completion of any sale (or the exercise of any option) is conditional (or cannot be exercised) until the overage payment amount has been agreed or determined. This will avoid any risk of having to complete before the overage provisions have been complied with.
Overage is complicated and there are many traps. If you require assistance dealing with overage please contact the Thomson Snell & Passmore development team and we would be happy to assist.