Overage agreements: Frequently asked questions
Overage agreements, also known as clawback agreements, are commonly used in commercial property transactions as an increasingly popular way for property developers and investors to protect their profits when selling property or land, that is expected to gain significant value in the future. Shilpa Unarkat, Partner and head of our Commercial Property team answers some frequently asked questions.
What is an overage provision?
An overage agreement, also known as an overage provision, is a contractual agreement where the seller of a property or land retains the right to receive an additional payment if the value increases beyond a certain threshold after the sale. Typically, such provisions are triggered by specific future events, most commonly the granting of planning permission being obtained irrespective of when, or if it is, implemented, or the development of the whole or part of the property or land.
How long is a property subject to an overage provision for?
The period can vary depending on the terms negotiated for as long or short a period as agreed between the parties. However, it is usually commonly set for around 15 to 25 years but can be for as much as 50 years or even longer.
Does an overage provision affect the value of the land or property?
An overage provision can affect the value depending on the terms of the overage and what the current owner intends to do with the property or land. In some circumstances, it can impact the value by potentially reducing its initial purchase price. Additionally, it can make it less attractive to some buyers who are unwilling to deal with the complexities or uncertainties of future payments.
Does it make it more difficult to raise finance on property or land subject to an overage provision?
Raising finance on property or land subject to an overage provision can be more challenging and some mortgage lenders do not like lending when overage provisions are involved.
Lenders may view overage provisions as an additional risk, potentially leading to stricter lending terms. It can sometimes be the case that the lender will lend on the property and any additional land subject to an overage will need to be held in a separate legal entity or otherwise not charged to the lender and sit outside the loan terms and the lender’s security.
This can mean that the land value is not taken into account for the purposes of the lender’s loan to value considerations.
How much will an overage provision require to be paid to the former landowner?
This depends on the agreement reached between the parties. It can be a fixed sum, but it is often expressed as a percentage of the increase in value of the property or land once developed or with the benefit of the planning permission in comparison to the actual price paid at the time of sale.
A typical percentage of 15% – 25% is relatively common, anything above that can lack commerciality for the onwards landowner and can prove to be prohibitive on resale or marketing the property for sale or development later on.
Are the terms of an overage likely to become a future dispute?
It is important that an overage provision is clear as to what events trigger the overage payment to be made and when it is payable. The calculation of the overage payment must also be transparent, typically involving a valuer to assess the property or land’s increase in value.
In cases where parties cannot agree on the valuation, an independent surveyor is usually appointed to make a final decision.
How we can help
Professional legal advice is essential for navigating the complexities of overage agreements and securing a beneficial outcome that is clear, enforceable and fair to all parties.
Sydney Mitchell’s Commercial Property team has extensive experience in assisting clients with their overage agreements. To get in touch with a member of our team to discuss your matter telephone 0121 698 2200 / 08081668827 or complete our online enquiry form.
