Sometimes referred to as “clawback”, overage refers to a sum of money which may be due to a landowner following completion of the sale of land or property. Whether this money is paid will be dependent upon something occurring as agreed (for example, the property being sold for a price higher than a certain amount).
An overage payment is conditional and not guaranteed, similar to an earn out, compared to other types of deferred payment.
The most common types of overage payments occur on a granting of future planning permission or based on the amount of sale proceeds.
A landowner can benefit from an overage agreement as it can ensure that they will share in any increase in the value of the land where a developer goes on to obtain new planning consent or sell for a higher price during a certain period. Overage obligations enable the seller to sell at the current market value of the property without having to forgo a share in the development potential of the property when that is actually realised.
However, it will likely result in a lower initial purchase price, because the developer will be unsure of the expected sales proceeds. It should also be noted as a landowner that an overage payment is not guaranteed therefore landowners should ensure the initial completion price paid is satisfactory and they should not count the overage payments as they are not guaranteed (and even if they are paid it could take a number of years).
The drafting of an overage arrangement can be complicated as it has to cover multiple future situations. The purpose of the agreement is to give effect to the parties intentions and to ensure that monies are due, if the necessary circumstances have occurred. There are also likely to be tax consequences for overage arrangements where overage is paid. For these reasons it is essential to take professional advice when negotiating overage and drafting the agreement.
Ai Law has a commercial property team advising on acquisition and sales of commercial buildings, development sites and land. Contact us today on 0151 294 4722 for more information.
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