The Devil is in the Detail: Top 10 Tips with Overage Agreements
The parties should consider carefully both the conditions which need to be satisfied for the overage to become payable and what the potential occurrences during the lifetime of the overage might be.
If it is likely that planning permission (or an enhanced one) can be obtained, the developer should be required to use reasonable endeavours to obtain that permission to increase the likelihood of the overage being payable. The relevance of permitted development rights should be considered.
Get the trigger right - the grant of planning permission is the preferred position for landowners as they can be assured that nothing further is required from the developer for the overage to become payable. A developer is likely to push for the overage to be triggered on implementation of the planning permission or the onward sale of the land with the benefit of the planning permission or the sale of the completed residential units.
If the developer is reluctant to accept the overage being triggered on grant of planning permission, a compromise can be delaying the payment date, rather than the trigger. In this way, the developer does not have to make payment until either implementation or onward sale and the landowner has a debt which it can enforce against the developer without having to prove the overage has been triggered.
Overages derived from sales revenue give rise to a number of issues. There should be an obligation to dispose of units to buyers, rather than holding to let.
Overall sales revenue based overages or yields per square foot create different problems. Discounts, extras and part-exchange sales give rise to potential problems in assessing the true sales revenue. Consider using the price declared on a UK Finance Disclosure of Incentives Form as a fair way to establish the true sales price achieved.
For a developer, make certain that any revaluation after a further planning permission is on a consistent “before and after” basis (particularly the date of valuation, treatment of hope value) to avoid paying overage on market movements or the infrastructure that you have provided and paid for. Beware also that if the market goes down and you re-plan to reflect changed market conditions you do not want to pay overage of the land is still worth less than you paid for it.
While overage may provide a landowner with some protection, be wary of deals whereby part of the headline price is foregone for overage. Best value could be a clean deal at a headline price, rather than being reliant on a future contingency that may never arise.
As much care needs to be taken over the drafting of overage provisions where there is no immediate prospect of development. Circumstances change, and there are now many potential development sites where beneficial development is prevented or delayed because the title is encumbered by overage obligations that render it unmarketable for development.
Consider carefully the duration of overage obligations – developers should expect them to run for the life of their scheme, but those imposed on land without immediate development potential create potential problems if they run for decades, including being unable to trace the beneficiaries and terms that do not reflect current market conditions.