This is part of a series of guides in which we examine areas of law that frequently arise in practice.

The Antiques Roadshow rewards the lucky individuals who discover that their treasured belongings are, albeit questionable, of 'great value' to someone somewhere. To add to the thrill the item was most likely acquired at a relative bargain. However, behind these rags to riches stories of heroic bargain hunting, the unfortunate seller that (unbeknownst to them) originally parted with the holy grail is forgotten and left with a feeling of regret wondering what could have been.

You don't want to turn on the TV and see the dirty old painting you sold for £1 at a car boot sale being valued for £15 million as a lost Rembrandt. If only you had negotiated an anti embarrassment provision at the car boot sale, you would be pocketing your share of the resurfaced masterpiece.

Equally you wouldn't want to find yourself in a position where after selling your property you discover it has been resold for a great deal more. For property, unlike the unfortunate Antiques Roadshow 'could have been' situation, there is a solution.

Overage and anti-embarrassment

Overage can provide the seller with a right to receive a share of any uplift made by the buyer of your property at some point in the future.

Overage is also commonly deployed as an anti-embarrassment technique for those who wish to avoid reputational embarrassment in the event that the buyer turns over a quick profit.

These provisions can be an excellent tool when negotiating the sale of land to a developer where the extent of their proposed plans are unknown.

Example

Following the sale of your countryside cottage, situated on large piece of land, the purchasing developer receives planning permission to demolish your cottage and build a luxury hotel. An overage agreement could be negotiated and entered into in advance of the planning permission being granted. This agreement could provide that you, as the original seller, will receive a proportion of the proceeds of a future sale of the property, in the event that the property has been developed into a hotel.

In practice

This may seem like an attractive clause to add into any property sale however it is only applicable where there is a likely cause or 'trigger event' in the near future that could increase the value of a property. It should also be noted that buyers, particularly developers, are likely to resist these agreements or clauses.

There are five key elements to an overage agreement:

  • duration of the agreement;
  • what the financial obligations will be;
  • how the payments will be secured;
  • how the obligations can be discharged; and
  • what will trigger the obligations.

Common trigger events are a grant or implementation of planning permission or completion of a development. Overage agreements may also include trigger events such as the disposal or sale of all or part of a property. It is also possible that the overage could be triggered multiple times by one of these events over the course of an overage period, such as each subsequent planning permission that is granted.

Overage provisions and agreements are always construed against the person that seeks to rely on them. For that reason is it crucial that sufficient clarity is given to ensure that the exact nature of the agreement between parties and their wishes are captured.

Securing overage

As seller you will require security and, likewise, the buyers will not want to be impeded by onerous obligations amongst a maze of trigger events. Overage often applies to successors in title. It is key that if you are the original seller, you have secured the obligation owed to you effectively in order to protect your interests in the event that the purchaser fails or refuses to comply.

You can secure your interests. Most commonly this is achieved through:

  • legal charge;
  • restriction on the proprietorship register of the buyer's title;
  • obtaining a covenant from the buyer to pay overage if a trigger event occurs;
  • restrictive covenants not to dispose of legal or equitable interest without a new purchaser covenanting to be bound by the overage obligations;
  • guarantee; and
  • ransom strips.

Each option has its own positives and negatives. For example a charge may reduce the attractiveness of your property as it could limit the buyer's ability to obtain finance in order to develop the property.

In the event of enforcement, a Receiver is commonly keen on overage provisions (particularly in the context of a development) so that creditors or borrowers are prevented from claiming the property has been sold off too cheaply.

Conclusion

Overage agreements and provisions can be complex and, given their specific nature, each must be bespoke to the transaction. Similarly if the chances of a trigger event occurring are slim, it may not be appropriate to include overage provisions. It is worth considering that the inclusion of overage provisions can reduce the initial purchase price and if you are waiting on a trigger event that never comes, you may be left worse off than they could have been.

There is a need to strike a delicate balance between the risks of potentially missing out on a substantial uplift and discouraging potential buyers. Whether the use is appropriate depends on a variety of factors and circumstance. A well thought out and carefully drafted overage agreement should benefit both the buyer and seller with little risk for disaster for either party. However, a poorly used and drafted overage agreement can inhibit the buyer to the point of preventing any uplift being possible and can, for the seller, drastically reduce the attractiveness of a property to the extent the land or property becomes unmarketable.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.