Overage Payments – What do they mean for a developer?

Overage payments are a popular method of funding developments. The owner of the land takes less money “up front” with the promise of more in the future. “Jam tomorrow” is the motivation.

The selling landowner sells the property to the developer for a sum that reflects it value as land without planning permission and then the selling landowner gets a further payment from the buyer (typically a developer) if the buyer obtains planning consent and the land increases in value.

These payments may take a lot of negotiation and can be time consuming and complex. The costs of putting the Overage agreement together can be costly and there are a number of potential pit falls so it may assist to remember the following points:

Be sure to keep the formula simple. In one case the formula was so complicated that after twelve drafts of the Overage Agreement neither party noticed when a key term of the formula was omitted that resulted in the developer paying an additional £500k in overage payments and a further £100k in legal fees. A costly error!

Make sure that the formula contains no ambiguities. In another case the overage could be calculated in two different ways. It took a House of Lords decision to sort the matter out resulting in hundreds of thousands of pounds in additional costs.

Try to restrict the duration of the overage agreement to as short a time as possible in all of the circumstances. The longer the period the greater hindrance there is to the Developer. If an Overage is in place for 10 years and is conditional on obtaining planning consent that increases the value of the land but the developer secures permission that does not increase the value within that time the developer would not be bound to make the overage payment. It could be that only on subsequent applications made during the 10 year period that there is an increase in the value of the land and therefore triggering the overage payment.

If you can, try to avoid the selling landowner trying to protect the Overage Agreement by registering a restriction on the title at the Land Registry, this may make it difficult to sell the land in the future, especially if the selling landowner has disappeared.

Don’t forget the SDLT (Stamp Duty) implications. As well as the immediate purchase price for the land you may possibly be paying more for the land in the future. Prior to completion of the purchase you must make a “fair assessment” of the likely amount that will be paid in the future and include this figure in the return that you make to HM Revenue and Customs. The Stamp Duty will be payable on the actual purchase price and the estimated overage figure. If the “fair assessment” cannot be made and the Stamp Duty is contingent or unascertainable then you may apply to defer the payment of the additional Stamp Duty but this application must be made within 30 days of completion. If you end up paying more than you estimated for the land a further calculation and payment of Stamp Duty will need to be made.

What may cause a problem is dividing the site up in to sections. Rather than making individual payments as parts of the land are purchased, which will result in staggered payments, it may be better to keep it simple and release the whole of the site from the overage as soon as practicable. Thus a developer will be able to anticipate the cost of the development sooner rather than later.

Also remember that an Overage Agreement can be incorporated in an Option Agreement as well.