Articles

Published by: Angela Thomas

An introduction to overage clauses for commercial property investors

For developers and investors dealing with commercial property, achieving a good return on investment is a top priority when disposing of an asset. This is not only a sound commercial objective but is likely to be an obligation for organisations such as trusts and charities which have to attain the best possible price. If the value of the asset when it is sold is not likely to be the best achievable price, vendors might put in place an overage clause. 

Overage Clauses - Commercial Property

Overage clauses - or uplift or clawback clauses - allow the vendor to receive an additional sum of money on top of the sale price, provided certain conditions are met. They are typically included when the best price for the property or land is likely to be realised at some point in the future, typically through the granting of planning permission that increases the value of the asset through extension or development.

These clauses are not standard, and as such require expert advice from an experienced solicitor - whether you are a vendor or a buyer. While the vendor will benefit from any uplift in the property’s value after the sale, overage clauses can also be beneficial for a buyer who can defer payment until the event that triggers the clause. It is therefore essential that both parties clearly understand their obligations under the contract and negotiate an agreement that does not unfairly disadvantage either side.

Issues to Consider

There are several issues to consider when establishing an overage clause - in particular, what triggers the payment of overage? How long do the obligations last, and is the payment a one-off or can it apply to multiple triggers over the agreed duration? How is the value of the payment calculated? And what happens if the property is sold on again? How will it be secured? Securing with a charge over the title to the land allows the vendor to force a sale of the property if their payment is not forthcoming, however buyers may prefer to negotiate a different form of security depending on their plans for the property.

The precise nature of overage triggers can vary but typically relate to the granting of planning permission - perhaps to build more houses than previously anticipated or for change of use. Overage clauses are sometimes included to protect the vendor from buyers who sell on the asset in its existing state but make a quick profit due to a rising market. Organisations that are duty-bound to achieve the best possible price for assets could receive considerable negative press if they fail to recoup some money in such circumstances.

Detail is key when it comes to overage clauses. The time frame can run from a year or two to many decades, and the agreed term often depends on the likely circumstances surrounding the asset’s future use when it is sold. The term should not be so short that it is financially attractive for the buyer to simply sit on the asset until the overage agreement runs out, before applying for planning permission and avoiding paying a share of the uplift. The point at which the payment is due must be specified in the contract - for example, is it due when planning permission is granted, when it is implemented or when the property is sold? The buyer should pay particular attention to this and ensure they are not taking on an overly burdensome agreement.

Contracts should state how the value of the uplift will be calculated, how it will be split between the parties and whether or not expenses can be deducted before the calculation is performed. Remember to factor Stamp Duty Land Tax and possibly VAT into the amount payable. The contract should clearly state when the clause is released - after the first trigger event or every time there is a triggering event? The agreement should apply not only to the immediate purchaser but runs with the land itself, thus binding any future purchasers of the property. 

Taking all of these factors into account, it is clear that negotiation between the parties and careful drafting of overage clauses is essential to ensure that agreements are reasonable, unambiguous and deliver the intended commercial benefits to both parties without imposing unduly onerous obligations on the buyer. At Taylor Walton, our experienced property team will help you achieve the best outcome for your transaction.

Should you have any questions then please feel free to contact Angela Thomas (Head of Commercial Real Estate department) on 01582 731161 or email angela.thomas@taylorwalton.co.uk.