Overage agreements

An overage agreement is a crucial legal tool used in property transactions, particularly when there is potential for future development or an increase in the value of the property after the sale.

In essence, this agreement allows the seller to benefit from any uplift in the property’s value due to certain events, such as gaining planning permission or completing significant development. The buyer agrees to pay an additional sum to the seller if these conditions are met, ensuring the seller shares in the financial gains even after the sale is complete.

Overage agreements are common in transactions where land has development potential, providing protection for sellers and transparency for buyers. They ensure that both parties have a clear understanding of their financial obligations, especially when the value of the land might increase over time.

What is an overage agreement?

An overage agreement is a contract between the seller and buyer of a property, specifying that the buyer will make additional payments to the seller if the property increases in value after certain conditions are met. These conditions could include securing planning permission for development, disposal of a property at a higher price or achieving specific milestones in a project. The agreement typically defines how the additional payment, or “overage,” will be calculated and when it will be triggered.

Key considerations in an overage agreement

Overage agreements must be carefully drafted to protect both parties and prevent future disputes. Essential points include the length of time the overage obligation lasts, how any uplift in value will be measured, how to secure the overage payment and what events will trigger the overage payment. Clear definitions of these terms are crucial for both sides to ensure there is no misunderstanding about when and how payments will be made.

How we can assist with overage agreements

At Moore Barlow, we provide expert legal guidance on overage agreements, ensuring that all aspects of the agreement are clear and enforceable. Our team helps draft and negotiate these agreements, making sure that the conditions, triggers, and payment mechanisms are well-defined. Whether you’re a seller protecting your future profits or a buyer needing clarity on your obligations, we ensure that your interests are safeguarded throughout the process.

What types of overage agreements are there?

There are several types of overage in an overage agreement, each designed to trigger additional payments under specific conditions. The following terms are often used in the property market:

Development overage

Development overage occurs when the value of land or property increases due to obtaining planning permission or development rights. The agreement typically stipulates that if the buyer secures planning consent for new construction or changes in land use, they must make an additional payment to the seller.

This overage ensures the seller benefits from the uplift in value that planning permission can create, especially if the buyer develops the property for residential, commercial, or industrial purposes.

Planning overage

Planning overage is triggered when the buyer secures planning permission that increases the value of the land or property. This type of overage ensures that the seller receives an additional payment if the buyer obtains permission to develop the land or change its use, such as turning agricultural land into residential or commercial property.

The payment is typically calculated based on the uplift in value caused by the planning consent. Planning overage protects the seller’s interest by allowing them to benefit from any value enhancement that planning permission brings to the property after the sale.

Sales overage

A sales overage (also known as turn overage) is triggered when the land or property is sold at a higher price than initially agreed upon. This type of overage usually requires the buyer to pay the seller a percentage of the profit made from the sale.

For example, if a buyer purchases land for development and later sells it for a significantly higher amount, the original seller benefits from the increased value through a pre-agreed overage payment.

Profit overage

A profit overage relates to the developer’s financial gain. It is triggered when the developer’s profits from the completed project exceed a certain threshold.

For example, if the buyer builds homes or commercial buildings on the land and sells them for a significant profit, the seller may be entitled to a share of the excess profits. This ensures that the seller benefits from the financial success of the development.

Future use overage

Future use overage applies when the land is used for a purpose that increases its value beyond the original intention. This type of overage ensures that the seller receives a payment if the buyer changes the use of the land or property in a way that significantly raises its value.

For instance, converting agricultural land to commercial or residential use may trigger the overage payment, ensuring the seller benefits from the value uplift associated with the new use.

Each type of overage is designed to protect the seller’s interest by ensuring they benefit from future increases in the property’s value, whether through development, sale, or changes in use.