What do we mean when we talk about overage?
Overage is a monetary sum paid by a buyer to a seller, after the sale of a property, in the event that a trigger event occurs. It is payable in addition to the purchase price.
What are the different types of overage?
There are broadly three different types of overage:
Planning overage occurs where the buyer secures planning permission for the property within a specified period.
Overage will become due from the buyer to the seller at an agreed point; this is normally (a) on the grant of a planning permission; (b) on the implementation of a planning permission; or (c) on the sale of a property with the benefit of planning permission. The buyer will likely prefer to pay overage on the sale of a property with the benefit of planning permission, as at this point it will have available cash from the proceeds of sale.
Overage will normally be a percentage of the increase in market value of the property as a result of the grant of the planning permission. The property will be valued on the date of the planning permission, comparing the value of the property with the planning permission versus the value of the property had the planning permission not been granted.
The parties will need to agree whether overage is payable each and every time planning permission is secured for the property or just on the first occasion planning permission is granted.
Turn overage occurs where the buyer sells the property to a third party, within a specified period, for a sum exceeding an agreed threshold. This type of overage is often seen where local authorities are disposing of land and are concerned that they will be embarrassed should the buyer flip the property at a far higher price than they bought it. This type of overage can also be referred to as an anti-embarrassment clause. The overage period involved is often relative short, being one or two years.
Overage will be a percentage of the profit made by the buyer in selling the property to a third party.
Plot Sales Overage
Plot sale overage is used where a seller has sold land to the buyer for the purpose of residential development. It is payable, if the buyer's profits from the sales of completed residential units, exceed an agreed threshold.
The overage payable will be a percentage of the profit made by the buyer, above the agreed threshold. This overage payment may be payable periodically (i.e. monthly or annually) or on the sale of the last residential units.
Why is overage useful?
Overage is a useful tool for both seller and buyer. From the seller's perspective, it is sharing in the upside of the property performing better than expected. From the buyer's perspective, rather than pricing hope value into the purchase price, it can pay across a sum if this value is realised.
However, whilst overage can be an exceptionally useful tool, there are a number of pitfalls and traps to navigate. For example, the parties need to agree how the overage will be protected.
Protection of overage
In its most basic form, overage is a contractual commitment by the buyer to the seller. As such, the obligations on the buyer do not automatically transfer to the buyer's successors to the property.
The most common way of protecting an overage agreement, is to procure from the buyer a contractual commitment that it will only dispose of the property if its successor enters into a similar overage agreement with the seller. This can be protected by way of a restriction on the title to the property, preventing the registration of the disposal of the property, without first complying with this contractual commitment.
Less common, is to secure the overage obligations by taking a legal charge over the property. This is the best form of security, as not only does it prevent the buyer from disposing of the property without procuring that its successor enters into a similar overage agreement with the seller, but it also gives the seller a mortgagee's power of sale, should the buyer, in breach of its obligations, fail to pay the overage. However, buyers are reluctant to agree a legal charge as it can make it more difficult to secure financing from a lender.