What is an Overage?
Overage clauses are a powerful tool for sellers to share in the future value of land, especially when redevelopment or planning permissions are anticipated. Often referred to as “anti-embarrassment clauses,” an overage allows a seller to secure a share in any uplift in value after completion without requiring the buyer to overpay at the outset. 

A buyer pays an additional sum if a specific “trigger event” occurs, such as planning permission being granted, development commencing, or the property being sold at a higher value. This ensures sellers benefit from the property’s full potential while maintaining flexibility for buyers. 

Key Considerations for Overage Agreements: 

1. Define the Trigger Event 

Clearly outline the events that trigger the overage payment. These could include: 

  • Grant of planning permission (after the judicial review period to avoid uncertainty). 
  • Commencement or completion of development. 
  • Disposal of the land with planning permission. 

You should ensure that there are detailed definitions within the agreement to avoid disputes, such as specifying what counts as “commencement of development.” 

2. Agree on the Overage Period 

Set a realistic timeframe for the trigger event to occur. This period should reflect the likely timescale for planning or development to materialise. Parties may negotiate extensions if needed. 

3. Payment Calculation 

Simplify the formula for calculating overage payments, ideally using a fixed sum or percentage. If based on profits or increased value, ensure deductions (e.g. planning costs, development expenses) are clearly defined. 

Both parties need to also consider a dispute resolution mechanism to address valuation disagreements as this can arise quite often especially for potential larger developments.  

4. Securing and Protecting Overage Rights 

To secure and protect the overage, the sellers require the buyer to register a restriction on the properties title, ensuring compliance with overage obligations before any land dealings. The restriction can then be lifted once payment is made or you can add carve outs allowing a sale to proceed provided the overage has not been triggered. 

5. Release of Obligation 

Determine how and when the buyer’s overage obligations will end. For example, obligations may be released upon payment or phased out during completion of a multi-stage development. Usually both a buyer and seller will agree a timeframe upon which the overage will last for if the land or property has planning potential.  

Conclusion
Overage clauses are a valuable mechanism for sellers to unlock additional profit while enabling buyers to manage initial costs. If any seller has any such intention this should be brought to the buyer’s attention at the outset to avoid any bad faith and further drawn out negotiations later on. However, these agreements are complex and require careful drafting to ensure clarity around trigger events, payment calculations, and security measures. It is important to note that early commercial agreement on key points can streamline the legal process, reducing costs and delays and it is worthwhile discussing this with your solicitor at the outset to ensure a clear set of terms can be proposed and agreed.  

At Lewis Denley, our Commercial Property team combines deep expertise with innovative solutions to help clients secure the best outcome. If you are a landowner or developer seeking advice on overage agreements or overage clauses, we’re here to assist.