Alastair Woodgate, Director of St Albans and Watford’s leading local Chartered Surveyors, Rumball Sedgwick, takes a look at one element of property negotiation that can be complex:
““What do you know about overage?” a friend asked over a drink a few nights ago. “Well, I know I wouldn’t be allowed on a Club 18-30 Holiday any more” I replied. But, guessing this was a property related enquiry, more reassuringly I explained, “Overage is a deferred payment to supplement the purchase price of a property” and I went on to explain, briefly, (since we were out for a drink), its typical use.
Overage is sometimes referred to as clawback. An overage clause is typically used when a property is sold, to enable the seller to share in any future uplift in value say if and when planning permission is granted for additional development that enhances the value of the property. It is conditional on a defined trigger point occurring, at some time after the date of sale. The amount can be fixed or it can be variable, according to a formula set out in the contract of sale. No one size fits all so every overage agreement is unique.
For the seller, the risk and costs involved in development are borne by the buyer, while, for the buyer (often a developer) an overage clause limits the financial outlay until such time as the uplift in value occurs: this of course might never happen in which case the buyer has not overstretched her/himself at the time of initial acquisition.
Overage is often used by charities to demonstrate that best terms have been achieved.
The trigger for payment of overage could be the granting of a planning permission or the implementation of a development or a future sale of the land/property in question. A Chartered Surveyor will have the expertise to understand the value attributable to overage and to get the balance between the best capital sum up front and a possible future ‘top up’ payment. It’s a case of finding the structure that best suits the circumstances. Complex provisions are expensive to negotiate so the scale of the overage payment needs to justify the costs.
Other forms of protecting an interest in property can be ransom strips or positive and negative (ie: “restrictive”) covenants on sale. Each has a specific use.
A ransom strip (often around a site or across an access) can stop a third party from gaining access to adjoining land. A positive covenant (eg: a promise to pay) requires a buyer to do something but does not bind future owners beyond the first buyer. Conversely a restrictive covenant (“not to” do or allow something) is intended to run with the land. For a restrictive covenant to ‘bite’ the seller needs to retain land, close to the overage property, that has the benefit of the covenant: restrictive covenants are designed to protect the nature, quality and amenity of the retained land rather than protecting a future payment.