Overage provisions in commercial property contracts – what do they mean?

Overage, also known as clawback, deferred consideration or uplift, gives a seller the right to receive further payments from a buyer in future. This usually happens when a certain event increases the value of the land, such as planning permission being granted.

The extra payment is typically calculated based on that increase in value and must happen within a set timeframe, which is known as the overage period.

Is it just a greedy seller tactic?

Not necessarily. While some sellers can sometimes be overambitious, overage provisions can help a buyer proceed with a deal by agreeing a lower initial price. Future payments only happen if things go well – for example, if development is approved.

Sellers like local authorities or charities may also have legal duties to achieve best value, and overage can support that.

That said, complex or unrealistic overage arrangements can reduce a property’s value or put buyers off altogether.

The legal considerations before agreeing overage 

These provisions are complicated, heavily negotiated and must be clearly drafted. They take time – and expert legal advice – to get right.

Buyers and sellers both need absolute clarity on what triggers an overage payment, how it’s calculated, and when it must be paid. And given overage periods can last 20 years or more, the time spent getting the detail right now is well worth it.

Typical overage triggers:

• Grant of planning permission for certain purposes – for certain developments or for a change of use
• The implementation of a planning permission
• A future sale or grant of a lease exceeding a certain length
• Completion of a development
• Completion of more than a certain number of units on a development
• A combination of the above – for example, the sale of a property following the grant of a planning permission.

Triggers can be one-off or apply multiple times over the overage period.

How sellers can protect their position?

Overage payments are usually a personal obligation on the buyer and won’t automatically pass to future owners. That means sellers risk losing out if the land is sold on. Common ways to protect the seller include:

• A mortgage – but if the buyer is having funding this often causes difficulties as the buyer’s lender will require a first charge so leaving the seller only with a less attractive second charge.
• Restrictions on the title – effectively locking down the title to the property so that nothing can happen - unless the incoming buyer agrees separately with the seller to comply with the overage provisions (via what is known as a deed of covenant).  Often the mechanism of choice as it provides a cost-effective way for protection of the overage – although not without risk to the buyer.  If, for example, a restriction is put on a title that nothing can happen without the seller’s consent, if the seller (being an individual) then disappears or (being a company) is liquidated, it can be very difficult and expensive to resolve the situation.
• Ransom strip or restrictive covenants – where a seller retains a strip of land or imposes restrictive covenants on the land which are only released following the overage payment.  This is less often seen, as it can be difficult to ensure their future effectiveness.
• Guarantee or bond - to protect the personal obligation of the buyer.  This sounds attractive – but becomes more difficult if the property is sold during the overage payment, as the arrangements have to be replicated with an incoming buyer which may not be easy to achieve

Is overage risk-free for sellers?

No. A lot can change over 20 or more years. Even if development looks likely now, it may not happen, and a buyer could choose to sit tight and wait until the overage period expires. That’s why it’s important to consider other ways of unlocking land value – like:

• Option agreements
• Conditional contracts (e.g. dependent on planning)
• Joint ventures between buyer and seller