Understanding the overage clause when buying and selling land

What is an overage clause?

When land is bought and sold in the UK, especially if it has the potential to be developed in the future, overage clauses are often included. This means the seller might receive extra payment if the land's value increases. A common reason for this "overage payment" is when planning permission is given to build on the land, for instance, turning a field into new houses, which significantly increases its value.

What Else Can Trigger an Overage Payment?

• When building work begins after planning permission has been granted.
• If the land is resold for a higher price relatively soon after the initial purchase.
• When the purpose of the land changes, for example, if farmland is converted into an area for shops or offices.

What are the main risks or complications associated with overage clauses for buyers and sellers?

Risks for Sellers

• Payment isn't guaranteed: The extra money only gets paid if certain things happen later, and they might not.
• Arguments can happen: If the overage agreement isn't written clearly, sellers and buyers might disagree on when payments are due or how much should be paid.
• It can be complicated: Overage deals are often tricky legal agreements. They need to be written very carefully to make sure there are no hidden problems.

Risks for Buyers

• Extra payments later: Buyers might have to pay more money in the future. This can affect their available funds and make it harder to get loans from banks.
• Property might be harder to sell: Having an overage clause can sometimes make the property less appealing to other people who might want to buy it later.
• Limits on building plans: The overage payment could make some building projects too expensive to be worthwhile, even if they have planning permission.
• Tax to pay: Buyers might need to pay extra taxes like Stamp Duty Land Tax (SDLT) or VAT on the overage payments. For the seller, working out the right tax (like capital gains tax) can also be complicated.

Frequently Asked Questions

Why is an overage clause used?

An overage clause is sometimes called a "claw-back" or an "uplift" clause. Sellers often use these clauses because they want to share in any future increase in the land's value. This is especially true if the land might be used for building in the future (like getting planning permission to build houses on a field). If this potential isn't clear when the land is first sold, an overage clause makes sure the original seller benefits if the value goes up later. For buyers, it can be helpful too. Sometimes, it means they pay a lower price to begin with, and any extra payment is spread out over time.

How is the overage payment calculated and what percentage is typical?

The extra payment is usually a percentage of how much the property's value goes up for example, imagine a piece of land sells for 1 million. If it then gets planning permission to build houses, its value might jump to 2 million. An overage clause would mean the original seller gets a share - perhaps 20% to 30% - of that 1 million increase. The exact percentage is agreed by both sides, but it's often somewhere between 15% and 25% of the increase in value. Sellers might ask for more, but buyers will want to pay less to make sure their building plans are still profitable. The agreement will also say if the buyer can take away any costs they had (like paying for planning permission) before the overage is worked out.

How long do overage clauses last and how are they secured?

An overage agreement can last for different lengths of time, depending on what the buyer and seller agree. It's often for 5 to 25 years, but sometimes it can be as long as 50 years. To make sure the payment is made, sellers often put a note on the property's official record at the Land Registry. This means the buyer can't sell the property on without the original seller agreeing. That agreement will only happen if the overage payment is sorted.