We are regularly asked to deal with the sale of land where an overage agreement is required. The first question is, what is an overage agreement? Essentially, such an agreement contains an obligation on the buyer of land to make a further payment to the seller in the future when a certain event, known as a “trigger event”, occurs.
The intention of an overage agreement is to secure a payment for the seller in the event that land is developed or is capable of being developed and increases in value. Anyone selling land should take advice from a surveyor on whether to impose an overage condition in the sale terms. If a buyer purchases agricultural land and then obtains planning for houses this will most likely increase the land’s value and without an overage agreement in place, the seller could be losing out.
What can an overage agreement cover?
It is important that both the seller and buyer agree the terms which are to be written into an overage agreement at the start of the process. For instance, what will the amount of overage be? Using agricultural land where planning permission is to be obtained for residential development as an example, typically it will be a fixed percentage (say 20%) of the difference between the market value of the land without the benefit of that planning permission and the enhanced value with planning permission in place. Thought then needs to be given to what will actually trigger overage. Will it be the grant of planning permission, implementation of that permission, the sale of the land with the benefit of planning permission, or even a combination of these events?
The next question to consider is, what kind of planning permission/development will trigger overage, will it be any change of use from say agricultural use or will it be limited to a particular change of use such as residential? Either way, it is our job as lawyers to ensure that these terms have been thought through and that any potential loopholes in the overage agreement are dealt with.
Finally, a thought should also be given to the length of the overage period.
Given the changes in recent years relating to permitted development rights, a buyer could seek to exploit the terms of an agreement requiring a planning permission for the change of use or development for overage to be triggered. Certain changes do not require formal planning permission and going back to our agricultural land example, agricultural land and buildings can be changed to a variety of uses subject to a requirement for prior approval from the local authority. It is therefore essential that any overage agreement captures permitted development rights as appropriate.
If you are selling or buying land subject to overage, whether it be a new overage agreement or an existing one we have the experience and the knowledge to help you.
Please contact James Goddard in our Commercial Property team on 01244 305912 for more information on overage agreements or any other agricultural property matters.