Overage payments

Overage is the legal device by which a seller can benefit from an uplift in the value of land after he has sold it.

It is becoming increasingly popular as it enables the sellers to share in the increased value of a site after development, without having the hassle of applying for planning consent or carrying out the development.

While it sounds like a simple concept, in fact it is a complex mechanism. Skill and care are needed to ensure that both parties understand exactly what they have agreed and how the overage will work in practice. For example:

• what are the trigger events?
• how long will the overage provisions last?
• how is the overage payment to be calculated?
• how will the overage payment be secured against the property to ensure payment?
• what practical problems might arise in carrying out the overage agreement?

A recent case showed how things can go awry. The seller owned a development site which had the benefit of planning consent for 42 residential units in two blocks. He sold the land to a house builder.

As part of the deal, the builder agreed to make a further payment to the seller if an improved consent was granted within five years. The agreement did not specify who would apply for consent, or even if it should be sought. It merely provided that if, in the five years following the sale, an improved consent was granted, the buyer would make a payment to the seller.

The builder started developing the site. In the meantime the seller applied for, and obtained, two new improved planning consents on the site and then tried to claim the overage payment from the builder. As the builder had neither been involved with, nor wanted, the improved planning applications, unsurprisingly he refused to pay.

The Court of Appeal dismissed the seller’s claim for payment. In the absence of express provisions in the overage agreement, it would make no sense to give a seller of land the right to trigger further payments without reference to the buyer. Had the seller acted as agent for the builder in obtaining the planning consent, that could have been regarded as an improved planning permission obtained by the builder. However, that was not the case in this instance; the seller had simply been trying to take advantage of weak drafting in the overage agreement and obtain a further payment which the builder had not expected.

The outcome of any dispute like this will turn on the precise wording of the overage agreement. Even though the court will look at the context of the agreement as a whole, the wording of the document can have a major impact on their decision.

A lawyer’s bill for expert drafting would be small beer compared with the sums at stake on deals of this sort.

As always, if you need commercial and pragmatic legal advice, we’re here to help so please get in touch.

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