Optimising the value of your land
Landowners negotiating the sale of their land will naturally want to achieve the best possible price. However, sometimes the best price may not be achievable until the future, for example where planning permission is pending for a more profitable use. By including an overage clause in the sale contract, landowners could ensure that they do not miss out on lucrative development deals in the future.
Before negotiating any sale or purchase of land it is important to assess the features of the land and the possibility for development in the future and what overage provisions are appropriate.
What is overage?
Overage is a sum of money the buyer is required to pay to the seller, representing a share in the increased value of the land, which becomes payable when a trigger event happens such as the grant of planning permission.
Overage is not always appropriate and unless you are selling with the specific intention of the land being developed, you will need to assess the likelihood of any such development in the future. The cost of negotiating overage provisions could outweigh any benefit and may affect the price the buyer is prepared to agree at the outset.
Negotiations and the documents to reflect the agreed overage provisions are usually complex. Therefore it is important that the essential terms are agreed and shown in the documents in detail, such as calculations to show how the overage payment will be achieved. The main terms will be the duration of the overage, the trigger condition, the amount payable to the seller and how the payment will be secured.
Probably the most important term is how the overage arrangement is to be secured. The land may change hands a number of times and you will want to ensure that successors to the buyer will inherit the overage arrangement.
There are various methods of securing overage and each have their own advantages and disadvantages.
A legal charge works in the same way as a mortgage, protecting the seller’s interest by registering the amount of the overage against the title of the land. This is preferable if you are a seller but if you are a buyer it could be problematic. If you are using third-party funding, your lender is unlikely to agree to anything other than a first legal charge. The lender may agree to a second legal charge, but this may be unsatisfactory to the seller.
Positive covenant and restriction
A positive covenant places an obligation on the buyer to make the overage payment to the seller. However positive covenants do not apply to subsequent buyers so, a "restriction" would need to be registered against the property at the Land Registry. The restriction prevents the buyer from selling the land unless any subsequent buyer enters into a deed of covenant with the seller. The deed of covenant creates a direct contractual relationship between the seller and the successor buyer, where the subsequent buyer is obliged to honour the overage agreement.
This restricts or prevents a specified use of the land and so the buyer will need to approach the seller to obtain a release or variation of the covenant from the seller in order to develop. The seller can, of course, require a premium to be paid for this.
The disadvantage with this method is that (i) the seller can only use this method if they retain land which can benefit from the restrictive covenant and (ii) the Lands Tribunal can overturn a restrictive covenant if its purpose is seen to prevent the reasonable use of the land. If planning permission has been granted it is more difficult to argue that the proposed new use is unreasonable.
This is the retention of a strip of the land, normally the access boundary, which prevents the land from being developed until a premium is paid. The effectiveness of this method depends on whether the buyer can obtain alternative access.