Overage: two sides of the same coin

Peta Dollar begins a two-part series on overage, looking at the topic from a seller’s perspective. When land is sold, the seller should normally do their best to sell at the best possible price; indeed, if the seller is a local authority or charity, they may be statutorily obliged to sell at the best possible price. Sometimes, the best possible price may only be available at a future date, such as when planning permission is granted for a more valuable use of the land. “Overage” (or “clawback”) is the term normally used in the context of a property transaction to mean a sum which the seller may be entitled to receive after completion if a specified event occurs. That event may be the grant of a new planning permission for the land, the construction of more than a specified number of houses or a larger-than-specified commercial development on the land, or the on-sale of the land in its present state, where the seller fears that the buyer may take advantage of a rapidly rising market to make a quick profit from the land. A more complex type of overage can be linked to the profit ultimately made by the buyer/developer from the development of the land. Alternatively, overage may be payable where some kind of problem or defect is removed from the land, making it more valuable. The main issues to be dealt with when drafting or reviewing overage provisions on behalf of a seller are: the overage period; the trigger event(s); how to calculate the overage; and how to secure the overage. Overage period Most overage provisions provide for the payment of overage where a trigger event occurs during a specified period (the overage period). However, there is no legal requirement for an overage period, and there is no reason that a seller should want to restrict the period during which overage may be payable. If there is to be an overage period, the seller will want it to be as long as possible. Trigger events – planning The most common trigger event relates to the grant of planning permission for the land. This may be the first planning consent to be granted or an improved planning consent, where the land was sold with the benefit of existing consent. A seller will want planning permission to be defined as widely as possible, so as to include both outline and detailed permission, and will not care if the planning permission is never implemented or is subsequently quashed. They should be particularly careful where the buyer wishes to exclude planning permission subject to “onerous” conditions, as this is often a way for the buyer to avoid paying overage. Many types of development, such as the building of flats on the roof of an existing building, do not always require the grant of planning permission, and a seller should ensure that such development will lead to the payment of overage, perhaps through additional trigger events such as commencement or completion of building work. If more than one planning permission is granted during the overage period, the seller will want each permission to lead to the payment of overage. Trigger events – sale The sale (or other disposal) of the land is frequently used as a trigger for payment of overage, and this is particularly important where the seller wishes to avoid the embarrassment of a quick resale at a substantial profit, or any suggestion that the original sale was at an undervalue. The main issue for the seller will relate to how “sale” should be defined in order to avoid the buyer finding a way to avoid paying overage. The definition should include every type of disposal of an interest in land, including a lease and a mortgage, as well as a change of control where the buyer is a non-natural person such as a company. If certain disposals are to be excluded, the seller should be careful to ensure that this does not allow the buyer to avoid paying overage; so only a mortgage in favour of a bona fide bank or financial institution should be excluded, and a sale for social/community purposes should not exclude the sale of affordable housing: see Burrows Investments Ltd v Ward Homes Ltd [2017] EWCA Civ 1577; [2017] EGLR 47. Where a disposal may not have been made at arm’s length, market value should ideally be substituted for sale price when calculating overage. The sale of a dwelling unit developed on the land may be a trigger for payment of overage. The seller will want “dwelling unit” to be defined as widely as possible so as to include affordable housing, sheltered housing, holiday accommodation and live/work units. The price paid for a car parking space and any other amenity should be included for the purpose of calculating overage: see Bride Hall Estates Ltd v St George North London Ltd [2004] EWCA 141; [2004] PLSCS 39. If the same number of units – but larger ones – are built, the formula should ideally cover this (through the use of “habitable rooms”) as well as commercial units built within a residential development or in substitution for an original residential development. It is not uncommon, where the buyer is a housebuilder, for the trigger for payment of overage to be the sale of the last unit within the development. In such a case, it has been known for a housebuilder never to sell the last unit, just to avoid the payment: see Sparks v Biden [2017] EWHC 1994 (Ch); [2017] PLSCS 170. If this trigger is to be used, it is essential for the seller that the buyer is under an obligation to build and sell all the units as soon as possible. Other trigger events As mentioned, both commencement and completion of development can be used as trigger events. Where there is a problem with the land at the time of the original sale which reduces its value, the removal of this problem should constitute an additional trigger event: see Hildron Finance Ltd v Sunley Holdings Ltd [2010] EWHC 1681 (Ch); [2010] 3 EGLR 1. Calculation of overage Most basic overage calculations are based on a formula where the original sale price is deducted from the price/value when the trigger event occurs. The formula should be kept as simple as possible and a worked example may be helpful to ensure that the formula works as expected. Where the land is to be valued with and without planning permission, the calculation of the initial land value should disregard any hope or expectation of the grant of planning permission, or of an improved planning permission, if the seller is to achieve the optimum overage payment: see Walton Homes Ltd v Staffordshire County Council [2013] EWHC 2554 (Ch); [2013] PLSCS 231. Advice should always be taken from a surveyor as to the basis on which land values should be calculated; generally it is better to adhere to the RICS Red Book guidelines, but specific assumptions and disregards may be appropriate in particular cases. It is essential, from the seller’s perspective, that any deductions are not made more than once. A housebuilder buyer will often agree to pay overage based on an agreed percentage of the excess of aggregate sale prices over a specified figure. The seller should ensure that the following are included within the overage calculations: (where the units are being leased rather than sold) the ground rents if sold separately; (where the buyer’s acquisition costs on a part-exchange property are to be deducted from the profits to be included in the overage calculation) any profit from the ultimate sale of the part-exchange property; (if any units remain unsold when the overage period expires) the value of the unsold units; and a cap on any extras/incentives provided to unit buyers. If the mechanism for calculating overage fails, an alternative method should be specified. Securing overage The method(s) used to secure the overage is vital for the seller. Ideally, the overage should be secured by the buyer covenanting to pay the overage and not to sell the land until the overage has been paid, with the positive covenant being secured by a restriction on the register of the land at the Land Registry. Alternatively, a charge over the land in favour of the seller may be used if the buyer will agree and does not need to charge the land as security for its purchase/development. In both cases, there may be issues if the buyer becomes insolvent; other methods, such as a ransom strip, will not be affected by the buyer’s insolvency and may be used in addition to a positive covenant/charge. A building lease – where the land is leased to the buyer until the overage has been paid – will normally work well for a local authority seller. Note that a restrictive covenant will be ineffective: see Cosmichome Ltd v Southampton City Council [2013] EWHC 1378 (Ch); [2014] 1 EGLR 171. Other issues Where the seller is a natural person, ensure they are defined to include their personal representatives and heirs. The seller’s administration costs in connection with the overage provisions should be payable by the buyer. If the seller has opted the land to tax, VAT should also be added to any overage payments. Peta Dollar is a freelance lecturer, trainer and writer Photo © Steve Smith/Unsplash