Overages (also referred to as “Clawback/Uplift agreements”) usually arise upon the sale/purchase of undeveloped or agricultural land, and represent an agreement between the Seller and the Buyer that, if the property was to benefit from the future grant of planning permission to allow for its development (and thus enhancing its value) then, in addition to the price being paid on the immediate sale/purchase, the Seller will receive an additional payment from the Buyer equal to a stated percentage of the resulting increase in the land value.

Overages are invariably encountered when dealing with the sale/purchase of agricultural land or else other undeveloped areas of land (e.g. garden land, vacant sites or potential development land – such as a block of garages – within urban areas.). They are not very frequently encountered when dealing with a standard residential sale.

Forty years ago, few sales would have included an Overage provision, which started as a simple concept and were intended to apply to a specific set of circumstances. Nowadays, there a very few transactions to which an Overage provision cannot be included and it has thus become a common (indeed, almost automatic) requirement involving greater complexity - even where there is no realistic possibility of the land being capable of development in the immediate future.

Land can of course be a good long-term investment, but the downside is that the owner/investor has to tie up his cash in the land for a considerable period of time. The benefit to the Seller of retaining an Overage upon the sale of  land is that the cash value of the land is released and made available to the Buyer immediately (and thus allowing the Seller to  re-invest  that cash in other quarters) whilst at the same time retaining for the Seller the possibility that the Seller might still derive a further cash benefit from the land if it becomes capable of development within the stated Overage period – very much a case of the Seller both eating the cake and having it.

In most circumstances, there is really no justification for the inclusion of an Overage on the sale of land – and particularly agricultural land in rural areas. Indeed, it would be an interesting experiment to see how a Seller of land might react to the Buyer’s suggestion that the Seller should likewise be required to account to the Buyer for a share of any increase in the value of any such investment by the Seller from the sale proceeds received from the sale. 

As will normally be the case, a benefit for one party will often operate to the detriment of the other. An Overage can inflict the following pitfalls on the Buyer:

• The immediate Buyer may be willing to take the existence of the overage on the chin, but there are many Buyers or Lenders out there to whom the concept is alien and who will be put off buying the property as and when the time comes to re-sell or lend – thus limiting the available market and/or possibly requiring a drop in price to counter such reluctance to buy.
• A planning application can be submitted by any individual (it does not need to be the owner of the land). The Buyer could therefore be forced into a sale of the land through no choice of his/her own by the grant of planning on such a third-party application. This is because many Overage Agreements require payment of the overage sum upon the grant of planning consent, rather than upon the commencement of development or subsequent sale. If the current owner does not have the required cash available to pay the Overage sum that has now become immediately payable, the Owner might well have to sell the land to cover the overage payment.
• An Overage payment might even be triggered by a grant of a lease or easements over the land. By way of example, this may cover the situation where a right of way is granted over an estate road to allow access required by an adjoining property for similar development. 
• Overage could have an impact on the amount of Stamp Duty Land Tax payable. This is because the Stamp Duty Land Tax is assessed on both the actual and contingent consideration (i.e. the amount the buyer may need to pay out in addition to the immediate price if the Overage is triggered).         
• There might be hidden additional cost, such as the legal fees incurred by the Overage owner for providing consent to a disposal of the land, or promotion costs.
• There is the danger that the person presently liable to make an Overage payment may become insolvent, and in some circumstances the Overage owner may be seek to refer back to previous owner(s) of the land for payment
• Badly drafted agreements, or a disagreement as to the amount by which the grant of planning permission has enhanced the value of the land, may lead to future disputes which can be lengthy and costly.

The above list is not an exhaustive list of things to consider when buying land being subject to an existing or new Overage agreement. There are many other aspects that a Buyer needs to consider.

Some of the above points may also be of concern to the Seller e.g. the potential for court proceedings in case of disputes. There may also be difficulty in enforcing payment where the current landowner has become insolvent. Any future Overage payments receivable may result in additional tax liability.  

An Overage is not appropriate in all cases. Overage provisions are lengthy and quite complicated to draft. Every Overage agreement has to be tailor made to suit the individual circumstances of the particular case. Therefore, always seek legal and tax advice to ensure your best interests are protected. An initial guidance from an Agent/Planning Expert/Valuer is strongly recommended. It is prudent to consider alternatives to an Overage agreement (such as an option or conditional sale) in cases where the need or desire to sell is not immediate.