Overage

I have been told the deal is subject to overage, but am not sure what this means?

‘Overage’ is the legal term for any money a buyer may have to pay a seller of property in addition to the agreed purchase price. It is also known as an ‘uplift’ or ‘clawback’ clause, and gives the seller the right to share in any later increase in the value of the property.

Usually a seller will try and sell at the best possible price, however for various reasons this may only be available in the future. The seller may be entitled to receive additional sums if certain conditions are met. These are most commonly the grant of planning permission; an increased density to an agreed development; or a share in profits made from a quick on-sale of property in a rising market.

Unfortunately overage is a complicated arrangement and has many potential pitfalls.

If you are selling

You may be considering including an overage clause, but sometimes it is not worth complicating the sale. The promise of overage is often used to help seal a deal where you as seller want more money for the property than the buyer currently wants to pay and you think that there is scope for a future increase in the value of the property. On completion you will no longer have any interest in the property and so certain terms need to be included in the sale documents to ensure that you secure your future payment. The best protection is a legal charge however this may be unacceptable to your buyer as it may prevent them getting funding.

There are also questions over the trigger, whether this is the grant of outline or full planning permission, commencement of development or completion of a sale. There are also questions over how long the overage should last, the percentage of the profit as well as how it is best protected.

If you are buying

Buying property subject to overage it is not all plain sailing. By agreeing to the overage you will affect your title to the property; at the very least this is likely to include a restriction against future dealings without the seller’s consent and may also expose the property to a legal charge. There may be problems in agreeing the overage sum payable once triggered which could have a negative impact and delay your future sale of the property.

Alternative approaches

Overage is a complex arrangement and is likely to increase time spent both negotiating the deal and preparing the legal documents. Both parties should think very carefully as to whether this is the most suitable course of action or whether an alternative arrangement would be more appropriate. For instance it may be better to have a conditional contract; an option to purchase, or for the seller to obtain the planning permission before selling.

Whilst overage may be a good way of securing a deal and completing the sale, to ensure that the overage works as intended by both parties this does need careful drafting. If you are considering a sale or purchase subject to overage, please contact us to discuss if this is the most appropriate solution for you and if so, how to document it.

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