Problems with Overage Agreements

Overage agreements are commonly used in property transactions, especially those where land and other sites are being sold with the potential for development. They can be a very effective tool for both sellers and buyers, helping them to manage their financial risks. That said, there are potential problems that can arise with overage agreements, especially if they are not properly prepared or fully understood by either party.

In this article, we will cover some of the key questions people tend to have surrounding overage agreement disputes, including what overage agreements are, why they are used, what problems can arise and how those problems can be resolved.

While we hope this information will be helpful for anyone buying or selling land where an overage agreement may be involved, please note that it should not be taken as specific legal advice. Every situation is unique, so we strongly recommend speaking to an expert in property transactions involving overage agreements at an early stage.

If you would like immediate advice on dealing with overage agreement issues, please contact the IBB Real Estate team on 03456 381 381 or email enquiries@ibblaw.co.uk to set up a meeting.

What is an overage agreement?

An overage agreement is a legal agreement between someone selling a piece of land or other site and the buyer. In essence, they state that if the land significantly increases in value after the sale, the seller would be entitled to an additional payment from the buyer. Typically, this would be a fixed sum or a percentage of the increase in value, but other mechanisms can potentially be used to calculate what the payment should be.

For further background information on overage agreements, please read our blog: What is an overage agreement?

Why are overage agreements used?

Overage agreements are common provisions in contracts of sale where there is a reasonable likelihood that the land or site being sold could potentially be used for property development in the future, but there is currently no planning permission in place for such a development on the site. This is because land that has planning permission will generally be much more valuable than land that does not.

The alternative to using an overage agreement is for the land to be sold at a higher rate than its current worth based on its existing permitted usage and on the basis that planning might be granted.

For the seller, using an overage agreement means they would benefit from the increase in value of the land should planning be granted. This allows them to sell the land at its current value while protecting them against the risk of losing out if the land substantially increases in value after the sale.

For the buyer, an overage agreement allows them to buy a site at a relatively low price compared to if planning were already granted. This protects them against the risk of having overpaid if they were to fail to secure planning.

Overage agreements can therefore be highly beneficial to both buyers and sellers, but only if the terms are sensible, the agreement is well-drafted and both parties fully understand what they are agreeing to.

What problems can arise from an overage agreement?

The most common problems that arise in relation to overage agreements is where there is a dispute over the terms or the interpretation of those terms between the parties. An effective overage agreement should make clear key points including:

• What specific events would trigger the overage payment(s) to become due (most commonly, where planning permission is granted/implemented)
• Over what time frame the overage agreement has effect (normally, there would be a time limit of a certain number of years from the date of sale, after which the overage agreement would no longer apply)
• How the overage would be calculated (e.g. whether it would be a fixed sum, a percentage of the increase in value or some other amount)
• Any deductions that can be made from the overage fee (e.g. the cost of obtaining planning permission, legal costs, building costs and any additional stamp duty land tax payable on the overage payment(s))
• What security is provided for the payment of the overage (e.g. a charge or restriction placed on the title of the property)

Problems can arise where such provisions are not included in the agreement, where they are ambiguously drafted so that the meaning is not clear and where the two parties simply disagree about what the terms mean or how they should be applied.

For example, there might be a dispute over whether the overage payment has been triggered or how much should be paid to the seller. This can normally be avoided by having the agreement drafted by an experienced real estate lawyer and both parties having appropriate independent advice, but sadly, this does not always happen.

How can overage agreement problems be solved?

There are many different approaches that can be used to resolve overage problems. Ideally, the parties would find a mutually acceptable solution without the need for court proceedings as these can be very costly and time-consuming. There is a very real risk that, if court proceedings are required, the legal fees involved could outweigh the amount in dispute.

A good overage agreement will normally include specific provisions for how any overage clause problems should be resolved. Typically, this will state that the matter should be referred to an alternative dispute resolution process, such as mediation or arbitration. These can allow problems with overage agreements to be resolved quickly and cost-effectively.

Mediation for property disputes usually takes place over a single day or half a day and involves both parties, their lawyers and a trained, neutral mediator getting together to discuss the issues and agree a way forward. This can be very effective and help to maintain a positive relationship between the parties. Mediation is usually the least costly way to resolve overage agreement problems.

Arbitration can be a good alternative to court proceedings if the parties cannot reach an agreement. The process involves retaining an independent arbitrator to determine how the matter should be resolved.

Both parties would need to agree to the arbitration and present their cases to the arbitrator. The arbitrator will then review the matter and provide an expert opinion on what the outcome should be. Their decision will be binding on both parties, so can provide conclusive resolutions to overage problems. While arbitration works much like court proceedings, it can usually be completed much faster and at a significantly lower cost.

How IBB Law can help with overage agreement problems

The Real Estate team at IBB Law can advise on all aspects of property transactions and disputes, including in relation to overage agreements.

Our expertise has been independently recognised by leading client guides Chambers & Partners and the Legal 500. Our lawyers have strong negotiation skills, alternative dispute resolution and court proceedings, so can give you the best chance of getting an outcome that suits you in the right way for your circumstances and priorities.

To discuss how we can help to navigate problems with overage agreements, please contact the IBB Real Estate team on 03456 3813881 or email enquiries@ibblaw.co.uk to set up a meeting.