Land Sales - Should you consider an overage provision?
It has become common for landowners to impose an overage, or “clawback”, provision on land sales, even on quite small holdings, especially close to established settlements.
What is Overage?
An Overage provision enables the original landowner to share in any increase in value of land arising from the grant of planning permission for development of the land. With the difference between agricultural value and development value being so huge, there is a risk of the original landowner missing out if the new owner succeeds in obtaining permission for development after the sale has occurred. With the Government eager to increase the number of houses built, even to the extent of re-drawing the boundaries of the green belt, it is often worth considering an overage provision even where there seems to be no immediate prospect of development being permitted.
How Does it Work?
An overage provision stipulates that if planning permission is granted for development of the land sold, within a specified time limit (typically between 10 and 80 years), then the original landowner will be entitled to a share in that increase in value, typically between 25% and 50%. The share should be sufficient to make it worthwhile for the original landowner but not so high as to dissuade the new owner from carrying out the development. It is usual to disregard any costs incurred by the new owner in obtaining planning permission.
What is Involved?
The instructions to include overage in a sale can usually be put in one sentence, but the need to cover all eventualities means that the actual provisions are generally quite lengthy and complicated.
Typically, the new landowner will have no funds when planning permission is actually granted, so it is usual for payment to follow either on a subsequent sale of the land to a developer, or when development actually commences, whichever is the earlier.
Because, under English law, contracts are not directly enforceable against future owners, the documents must also provide for a direct covenant to be provided for the benefit of the original landowner on each sale.
What is the Downside?
Some purchasers are reluctant to have their land encumbered in this way.
The difficulty of covering as many eventualities as possible makes it hard to ensure that the outcome is fair to both parties regardless of future events.
The length and complexity of the provisions required make it a specialist task that not all practitioners are proficient in dealing with. It is wise to ensure that your solicitor is experienced in dealing with this area of law.
Inevitably, legal costs will reflect the fact that drafting is not so straightforward, and any return on those fees may not be seen for many years or, indeed, ever, so overage provisions are not appropriate in every case.
It is wise to speak to your solicitor at an early stage to discuss the provisions and their suitability.For further information relating to this article, please contact Julian Rowden.
Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.