What are the benefits of an ‘overage agreement’?
If a commercial property has future development potential, a seller may consider imposing an overage arrangement entitling them to consideration for future payments in addition to the original purchase price.
Overage is usually payable if a trigger event has taken place that has the potential to increase the property’s value (eg the grant of planning permission or the completion of a development).
The length of the period during which overage is payable is agreed between the parties. The seller will want a long period to benefit from future uplift in value, while the buyer will want a short period to reduce the risk of paying overage.
The seller must secure the buyer’s obligations to pay any overage payments. This can be done by registering a restriction against the buyer’s title to the property at the Land Registry to prevent sales without the seller’s consent, or by the seller taking a legal charge over the property.
It can also be achieved by introducing a ransom strip retained by the seller and then transferred to the buyer on payment of the overage.
Overage benefits the buyer, who buys the property at current market value rather than an overinflated price based on future speculative development, allowing them to manage risk and cash flow.
The seller benefits from a share of the uplift in value without using their own funds or resources to obtain planning permission. It also incentivises sellers to sell rather than retaining the property due to its future development potential.
Overage is not appropriate in all situations, particularly where there is a low likelihood of the land being developed. The time and expense of drafting and negotiating overage agreements may be disproportionate to the likely uplift in value and may delay the sale.
Overage provisions may also reduce the purchase price the buyer is willing to pay.
Overage agreements can be complex, and great care needs to be taken when negotiating and drafting overage provisions. If you require help with overage agreements, please contact our commercial property experts on 01206 574431 or at enquiries@tsplegal.com