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If you are selling land to a developer, their aim will be to increase the value of the land and make a profit when they sell it on.  If you want to share in that uplift in value when your land is developed, you will need an overage arrangement to make sure you receive an additional payment. These clauses can be delicate to negotiate and it is important to avoid leaving any grey areas which could lead to a dispute or leave you out of pocket. It is crucial to get legal advice on what the overage provisions should say and how you can make sure you get the payment you are expecting in the future.

For many landowners, it makes good sense to sell to a developer rather than try to develop the land. If you can negotiate a good deal, you can get the benefit of a developer’s experience with an agreed chunk of the profit they make from the development. This is usually called overage. However, there are plenty of traps for the unwary, which is why you need an experienced solicitor on your team.

We highlight three key issues to consider in your negotiations below.

Triggers for an overage payment

You need to agree when the developer must make an overage payment.  The simplest approach is to provide for a one-off payment, after which the overage obligations will be released. There are some obvious potential trigger events, for example:

• when the developer gets planning permission for the proposed development;
• when work actually starts to implement the planning permission;
• if the developer sells the land with the benefit of planning permission but before work has started; or
• when the developer sells the developed land.

Broadly speaking, the sooner you get your payment, the less vulnerable you will be to the developer delaying the development work or possibly not even doing it at all.  If you get your overage as soon as the planning permission is granted, you are no longer interested in how fast the development goes ahead or what the eventual sale price is. However, the developer may want to push it forward, at least until the work has started, in case something unexpected prevents or delays the development.  This is really a commercial negotiation but your solicitor will explain the possible risks and rewards of waiting until the land has been developed or sold.

Some types of development may lend themselves to multiple payment triggers, for example if there will be several houses built on the land and sold off separately.  You may be able to negotiate an initial payment when planning permission is granted, with further payments once each house is sold.

Whichever triggers you settle on, the overage provisions should include obligations on the developer to do what is required to get to those milestones, for example using reasonable endeavours to obtain planning permission, carrying out the development within an agreed period and, if overage is linked to the eventual sale price, not selling at less than full market value.

It is common for planning permission to come with requirements for parts of the development site to be transferred so they can be used for infrastructure or public amenities.  The developer will want it to be clear that disposals like this will not trigger any obligation to pay overage.

Calculating the overage payment

The basis of your overage payment will be an agreed percentage of the developer’s profit but there are different ways to calculate this, depending on what payment trigger has been agreed.  For example, an overage payment triggered by the grant of planning permission would typically be based on an agreed percentage of the difference between the market value of the land with the benefit of planning permission and its market value without permission.  Overage triggered on a further sale of the land is usually based on a percentage of the difference between the price at which the developer sells and the original price you received.

Beyond the basic parameters, the developer will want the right to deduct costs incurred in achieving planning permission, providing necessary infrastructure and, if selling a developed site, the costs of carrying out the development.  Again, this is fundamentally a commercial negotiation. The developer will want to deduct as many costs as possible before calculating the overage percentage.  You will want to limit the deductions, and your solicitor can try to negotiate a cap on the total costs which can be deducted.

Once you have agreed the deal, your solicitor will make sure it is accurately reflected in the overage agreement.  This sort of drafting can be complex, so you should work with your solicitor and any other advisors to check the formula with actual figures to make sure it gives the result you expect.  It is a good idea to include a worked example as well as a formula in your overage agreement, so it is clear how both you and the developer expect the calculation to work.

Securing the overage obligation

The other key challenge with an overage arrangement is how to make sure you can enforce it.  An agreement to pay overage is a personal obligation undertaken by the developer, which means that if they breach the agreement and sell the land without paying overage, the new owner will not be bound by the agreement and you will be left to sue the developer for breach of contract.  It used to be possible to take a charge over the land as security for payment of the overage but modern lending practice makes it very difficult for the developer to use the land to raise development finance if there is any other charge in place.  Instead, the most common way to secure overage is to agree a restriction on the land registry title preventing any future disposal being registered unless the new owner enters into an overage obligation on the same terms.

You must make sure the developer knows where to contact you while the overage obligations are in force and, if you have a land registry restriction in place, notify the land registry of any change of address.  Your overage arrangement should also require the developer to keep you informed of their current contact details and of key milestones that may trigger overage payments.

How we can help

Overage payments can form a significant part of your long-term return on the sale of development land, so it is vital to get them right.  We have expert lawyers who can help you throughout the process, from the initial deal right through to receiving your payment and releasing the overage obligations.

For further information, please contact one of our Commercial Property experts today.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.