This article, authored by Fladgate LLP associate, Daniel Rubie, appeared in the FT on 3 November 2008.
I am the director of a property management company which owns some land which is prime for residential development. I do not want to develop the land myself but am interested in maximizing my return on the land and have heard that overage provisions might help me do this. Can you explain how this works?
Overage is a fantastic method for both parties in a transaction to achieve a commercially viable price. For the Seller it achieves this price without the risks associated with developing the property themselves. However, it can prove to be even more beneficial to the Buyer who can purchase a property at face value with reduced capital investment.
Overage provisions are negotiated at the contract stage of a property transaction. The Seller and Buyer agree that following completion, if certain conditions are met which increase the value of the property, then the Seller will be entitled to a proportion (negotiated in the contract) of this increased value in addition to the original sale price.
Examples of common conditions are the granting of planning permission, an increase in the number of properties being built on a site or completion of the development.
For example, X agrees to sell his land to Y for £100,000 and negotiates with Y that should Y build more than 10 houses on the land, then he will pay X an overage percentage (for example 50 per cent) of the sale price of each additional house.
The Seller must then secure this payment by entering a restriction on the title preventing an onward sale without their consent, by taking a charge over the property or by restrictive covenants preventing development without their consent.
Overage provision must be clear and both parties must be careful when agreeing drafting to ensure that all possible scenarios are covered. Loopholes are easily overlooked and can result in little or no overage payment despite the satisfaction of overage conditions. A Seller should remember that it is often better to receive a small percentage of the gross value of the land rather than a large percentage of net value (after build costs etc.) as these costs can be presented in a way which greatly reduces the overage payment.
For further information, please contact:
Amanda Hado-Bodfield, Partner, Fladgate LLP (firstname.lastname@example.org)