What is overage and how can you enforce it?

Demand for new housing and increased development has lead to an increase in overage agreements. Owners of land with the benefit of valuable planning permission or land which has potential for future development need to be aware of “Claw Back” or “Overage” and how to enforce it. 

When a land owner sells land to a developer who in turn will develop the land in accordance with a planning permission or who will make an application for a planning permission, which would result in the significant increase in the market value of the land after it is sold, the original land owner would be well advised to seek an overage payment.  

An overage payment is usually a payment to be made to the original land owner in the event that a valuable planning permission is granted. The payment will usually be a percentage of the difference between the market value of the land with the benefit of planning permission and without it.

So how is overage enforced?  Commonly overage provisions are included in the legal transfer deed made between the seller and the buyer or, alternatively, a separate Overage Deed is used setting out the circumstances and payment obligations.  

As positive obligations do not automatically bind successors in title, it is essential that the original landowner protects the overage payment by contractually obliging the buyer to register a restriction on the registered title of the land on completion. The restriction will restrict the buyer from making further disposals of the land unless a deed of covenant is obtained from the incoming buyer to observe and perform the positive overage obligations. This is the most commonly used mechanism of enforcing the positive obligations against successors in title however, a legal charge and restriction can also be used to protect the overage payment if required.

The overage clauses covering payment and the calculation can be very complex, so it is absolutely essential that the formula and drafting are correct and clear as failure to get it right will mean that the overage payment is incorrect and could lead to very expensive litigation. Overage agreements are therefore heavily litigated if they are not clear or give rise to uncertainty but if approached in the correct fashion, overage is beneficial to all land owners who wish to share in the profits made in future property development.