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Overage in residential development

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Posted by Andrew Dudley on 09 August 2018

Andrew Dudley Social Housing Sector Lead

What is Overage?

In simple, practical terms, overage is a future payment to be made to the seller of land, by the buyer of land. The payment is usually conditional on the occurrence of a specific event, and is usually linked to the enhancement of value of the land, whereby the seller and purchaser each share in the enhanced value.

In legal terms, overage is a contractual arrangement that forms part of the overall consideration for the sale of land. It is payable post completion of a sale, and does not constitute an interest in land.

Overage provisions may be included in a contract for sale, the transfer document, or in a separate overage deed, and different forms of overage may be agreed depending on the particular circumstances. Common types of overage when selling land for residential or potential residential development include, planning overage, sales overage, and overage payable in the event that a buyer disposes of undeveloped land at a profit.

Planning Overage

Planning Overage is an uplift payment due once planning permission has been obtained because, due to the grant of such planning permission, the land value has increased significantly from the original price paid. The trigger events for calculating Planning Overage might be the grant of a planning permission, the grant of planning permission that is immune from challenge, implementation of a planning permission and/or disposal of the land with the benefit of planning permission.

Once a trigger event has occurred, the contractual documentation agreed by the parties at the outset governs how the overage payment is calculated. The contract documentation will include a formula prescribing how the overage will be calculated, and the original seller is usually due a percentage of the increase in the open market value of the land. The parties may also agree certain deductions from that payment. For example, the costs of the buyer in obtaining the planning permission, the original price paid for the land, any previous payments of overage that may have already been paid, and other costs and expenses which the buyer will incur as a direct result of obtaining planning and/or paying the overage.

It is prudent to include a disputes provision in the documentation, in the event the parties cannot agree the amount of overage due. Depending on the agreed trigger event for calculation of the overage, payment may be due on the later of grant of planning permission that is immune from challenge, implementation of the planning permission, disposal or, if later, agreement or determination of the amount of overage due.

The parties also need to agree at the outset whether they intend the overage to be a one-off payment, whereby the overage provisions fall away in relation to all of the land, or that part of it that benefits from planning permission once the payment has been made, or whether they intend the overage provisions to continue to apply, which is commonly known as “rolling overage”. This means that if a buyer, or their successor, subsequently obtains a more valuable planning permission to that originally granted, a further payment would be due to the seller.

If rolling overage is agreed, a developer will want to ensure it can dispose of the land in the way envisaged by the original planning permission without passing on the overage liability. For example, a residential developer will want to dispose of completed dwellings, affordable housing land, and land required by utilities or the local authority without liability on those incoming disponees to pay overage. As such, rolling overage provisions are likely to include a number of carve outs, or “Exempt Disposals” to allow the land to be developed and sold in accordance with the original planning permission.

Sales Overage

Sales Overage is an uplift payment that may fall due where the developer buyer expects to generate a certain base revenue, and agrees to effectively share any additional revenue generated with the seller.

The trigger event for calculation of such overage would be exceeding the agreed base revenue, and again the seller is likely to be entitled to a percentage share in the enhanced revenue. There may be certain exclusions or deductions from the calculation, for example sales revenue from affordable housing, plot buyer’s incentives or extras, sales costs, part exchange and other costs incurred by the developer to achieve the overall enhanced value.

Depending on the size of the development and the agreement reached between the parties, payment may be in stages, for example quarterly or annually, or at the end of the development, and reporting obligations and a disputes provisions should be included in the drafting.

Sale at a Profit (Anti-Embarrassment Overage)

This is overage that falls due when a buyer sells undeveloped land at a profit, without the benefit of planning permission. For example the seller sells to Developer A at a fixed price, and Developer A immediately, often on the same day, sells the site to Developer B for a profit. This would leave the seller in an embarrassing position, and to avoid such embarrassment, provisions may be included in the original sale documentation that require Developer A to pay all or part of the profit it has made to the original seller.

Key Provisions

The parties need to consider at the outset how long the overage provisions should last. This should be a commercial and practical decision having regard to the land in question, but there is nothing to prevent the overage provisions lasting for more than 80 years.

A crucial part of the overage provisions that the parties must decide at the outset is how payment will be secured. A contractual obligation to make a payment is not necessarily sufficient, and in light of the Cosmichome Ltd v Southampton City Council [2013] case, it is not advisable to secure monetary sums by way of restrictive covenant. The most common way of securing overage is now a legal charge or a restriction on title, preventing a disposal without the incoming disponee entering into a deed of covenant to observe and perform the overage provisions.

About the author

Andrew Dudley

Social Housing Sector Lead

Andrew specialises in property development and stock transfer for Housing Associations.

Andrew Dudley

Andrew specialises in property development and stock transfer for Housing Associations.

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