Overage agreements demystified: Key clauses and considerations for developers and promoters

Overage agreements are often encountered when acquiring land as a protective measure for landowners to seek an additional payment if the value of land increases. However, early legal review is essential to avoid delays or renegotiations during acquisition and to ensure the site can be developed as intended – especially as the documents are complex and often contentious. This insight explores what overage agreements are, as well as highlighting key clauses to consider when looking to acquire land.

What are overage arrangements?

An overage agreement is an arrangement whereby a buyer agrees with a seller that they will pay an additional sum to the seller if specified events occur during the overage period (known as trigger events) which lead to an increase in value of the property, such as planning permission being granted or implemented, or the property being sold for a higher price than the initial purchase price.

Overage agreements are usually secured against the title to a property to ensure they bind successors in title. For this reason, it is imperative that any subsisting overage agreement is considered at the early stages of a proposed site acquisition, and certainly prior to any Heads of Terms being negotiated and settled, as the existence of any overage could have various implications for both the owner and the developer/ promoter and affect the ability to develop and dispose of the site as intended. 

Frequently, a deed of variation may be required to vary the terms of an existing overage agreement to ensure the land can be acquired and developed as anticipated. As overage agreements have evolved significantly in recent times, historical overage agreements often fail to deal with key commercial points and are not up to modern industry standards. 

The need for a deed of variation could also impact the conditionality of, and timescales of, any obligations within an acquisition contract, and so any early review is recommended to ensure the Heads of Terms do not need to be renegotiated at a later date. 

Key clauses to consider 

When reviewing an existing overage agreement, the following points should be considered:

1. What event(s) will trigger the payment of overage and practically when will any overage payment become due on the transaction? Any necessary owner obligations relating to the payment and release of any overage can then be included in the acquisition agreement as appropriate. 
2. What are the terms of the overage agreement and, if the agreement still subsists, when will the agreement come to an end? 
3. What percentage of overage is payable and how is the overage sum otherwise calculated? Usually, an overage payment will be calculated as a percentage of the open market value of the property and/ or the sale price and consideration is often not given, where relevant, for any equalisation of the land, any deduction of the promoter’s share of any sale proceeds and/ or any costs permitted to be deducted pursuant to an acquisition contract. Consequently, there is often a shortfall between the price the owner receives and the figure any overage payment is calculated upon. Whilst this is predominantly an issue for the owner, this could affect the minimum sum which an owner is willing to accept on any disposition and the owner’s willingness to accept deferred payments (as the owner will have both a tax liability and an overage liability to settle on disposition). Accordingly, an owner may also want to negotiate a deed of variation as part of any acquisition, so any overage payment is calculated on their actual receipts.
4. If the overage arrangement is linked to planning, what form of planning permission would trigger an overage payment, e.g. full, hybrid, outline or reserved matters, and does the timing of any payments work practically with the deal which is being negotiated? Further, consideration should be had as to whether the agreement allows for the judicial review period to pass before any overage sum becomes due (where relevant). 
5. What type of development would trigger an overage payment and are there any restrictions on any other types of development, such as ancillary retail development, which would require the overage terms to be renegotiated?
6. Whether the property, or any relevant part, will be released upon payment of any overage payment or whether the agreement anticipates multiple overage payments being made throughout the term (if more than one trigger event occurs). If the latter, it should be considered whether this will cause complications for the disposal of the site as intended and how this could affect the price. 
7. What permitted disposals can be entered into without the need for a deed of covenant being required from the disponee, i.e. a covenant directly from the disponee to the beneficiary confirming they will comply with the terms of the overage deed from the date of the disposal to them? If an overage deed requires multiple overage payments to be made during the term if more than one trigger event occurs, then the permitted disposals should be considered carefully to ensure the site can be disposed of as intended and all necessary disposals should take place free of the overage agreement, such as disposals of plots, public open space, affordable housing, infrastructure etc. 
8. What are the notification and marketing requirements and are these achievable and appropriate? Frequently, historical overage agreements include onerous notification requirements, including notifying the beneficiary of any planning application, planning agreement and all disposals and permitted disposals (which would include each and every plot sale). Further, some overage agreements include provisions giving the beneficiary an element of control over the marketing, sale process or price which may not be acceptable in practice.
9. How is the overage protected and how will any release be procured for either the initial acquisition or any subsequent disposal? Any restriction on the title register of the property should be reviewed to confirm whether any conveyancer can sign a certificate on any disposal of the property to confirm the terms of the agreement have been complied with or they do not apply to the disposition, or whether the certificate must be signed by the beneficiary or their conveyancer only. If the latter, this could affect plot sales and be an administrative and costly burden. 
10. For any agreement where planning preservation steps could be taken pre-acquisition, it should be considered who would pay the overage in such a scenario if this would trigger an overage payment. 

Summary 

Overage agreements are extremely complex and often contentious documents which have evolved significantly over time. Therefore, it is crucial that any existing overage arrangement is reviewed at an early stage of a proposed deal, and legal advice is obtained on both the overage agreement itself and the proposed Heads of Terms, as commonly, a deed of variation may be required to enable the property to be acquired and developed as intended.