Drafting or disputing an overage agreement?

Whether you call it overage, clawback or uplift, this complicated aspect of land development sales is becoming increasingly common and contentious.

Put simply, overage clauses in property sale contracts allow the seller, in certain circumstances, to receive additional payments from the buyer if the land turns out to be more valuable after completion than projected.

This is always subject to an agreed ‘trigger’ event or events taking place, usually the granting of planning permission for development.

Why are disputes relating to overage agreements becoming more frequent?

These agreements have been subject to expensive litigation on a number of occasions because of the large amounts of money which can frequently be at stake.

Calculation of the overage payment has been a matter of hot dispute in various cases because it needs to consider the developer’s profit margin, contribution to community infrastructure and costs of developing the land, perhaps in conjunction with other land adjoining.

Even a simple drafting error can be disastrous which is why it’s so important take specialist legal advice not only when negotiating and documenting an overage agreement but if you need help resolving an overage clause dispute.

Recent overage disputes include:

• London & Ilford Ltd v Sovereign Property Holdings Ltd (2018): The Court of Appeal did not agree that the developer, London & Iflord, could be spared paying an overage sum of £750,000. Even though planning permission had been granted to convert offices into residential units, this was scuppered by changes to Building Regulation fire escape provisions which meant the proposed development couldn’t possibly comply and therefore couldn’t happen. The Court ruled that because Building Regulations were neither mentioned in the overage agreement nor a requirement of it, the overage sum was still payable to the seller, Sovereign Property Holdings.
• Wimpey UK Ltd v VI Construction Ltd : In this case, the formula for calculating the overage payment was so complicated that one party didn’t notice a crucial part of the method was not included in the final contract. The Court of Appeal refused to rectify the document on the grounds that both parties had missed the error.
• Barnet London Borough Council v Barnet Football Club Holdings Ltd : A drafting mistake over the positioning of brackets in a sentence led to a legal battle relating to a potential development value of more than £5 million. Again, the Court of Appeal refused to allow this mistake to be put right.

Why is it so important to get your overage agreement drawn up by a specialist lawyer?

Many things need to be carefully considered and negotiated between buyer and seller when an overage is required.

Careful attention must be paid to the trigger event – this defines what specific action will require the buyer to make a further payment to the seller.

Common trigger events are the granting of planning permission for development, or its implementation, or disposal of the property with the benefit of planning permission.

The parties must also agree if there to be more than one trigger event and how the obligation to pay the overage money is secured.

In addition, they must agree the length of time for which the overage clause is to run. This is a matter for negotiation between buyer and seller and depends upon market conditions and the likely timescale for making applications to develop the land in question.

Are there other options to an overage agreement?

Instead of an overage agreement, where there is imminent expectation of redevelopment, sellers will frequently grant the buyer an option to enter into a conditional contract to purchase the land.

The buyer can proceed to incur the costs and time needed to obtain planning permission knowing that they can then require the seller to complete the transfer of the land for a pre-agreed purchase price, or a purchase price to be calculated based on the new market value of the land.

Get in touch

Wards Solicitors’ Commercial Property Specialists can advise on the creation of these agreements and our Property Disputes Solicitors are well versed in the legal principles applied to them if a dispute resolution process is needed.

For help to negotiate and document an overage agreement please contact Heather Jones, Head of Business Services and Commercial.

• Email Heather: heather.jones@wards.uk.com
• Phone Heather: 01275 850470

For advice on resolving a dispute about overage clauses and their interpretation  or application, please contact our Property Disputes Partner, James Taylor

• Email James: james.taylor@wards.uk.com
• Phone James: 01454 204880