Sophie Robins, Commercial property expert explains what an overage is, and how they are used in sales of property.
What is an overage?
An overage is an agreement to share the proceeds from the future sale or sales of property with the original seller. The terms are typically secured by way of a restriction against the property thereby preventing its transfer to a new owner/s without consent of the original seller and/or payment under the terms of the overage.
Why include an overage?
The incorporation of overage terms in a transaction has become increasingly popular over the past 20 years in line with the increase in property values and changing development prospects.
Typically, these terms are used when there is sale of land which the original seller believes has potential for development and wishes to secure additional payment in the event of its development at some later date by a future owner.
It is a bespoke contract and there are few standard terms. This means there is a lot of scope for negotiation and accurate drafting is key to ensuring the terms will be adhered to over time.
Having said that, an overage agreement can be a straightforward agreement to pay a fixed sum on the future sale of the property within a fixed timeframe, once there has been a trigger for payment (typically when planning permission is granted).
Or, the overage terms can include more complicated provisions such as various trigger dates, overage sums calculated by reference to the uplift in value at a certain point in time; types of transactions involving the land that are excluded from the payment under the overage provisions (e.g mortgage charges, grants of easements); agreed deductions for costs relating to obtaining the planning permission; and dispute resolution mechanisms to name but a few.
The agreement should also set out the times when payment is to be made and when the agreement comes to an end.
How do I ensure an overage is adhered to?
The overage should be registered against the property concerned by way of a restriction on the property’s title held at HM Land Registry. This will prevent a sale being registered in to a new owner without consent from the person with the benefit of the overage. It will therefore require separate negotiation to remove the restriction during the overage term.
For further information on overages, or for advice on another commercial property matter, please contact a member of the Commercial Property team