Overage 2: Profit lost for ever
Dropped between the floorboards
The problem is that neither the solicitor nor the estate agent can see outside his own narrow professional experience. As you will have noticed, the start point in my scenario is the bewildering array of options open to me. Estate agents do not have the experience of what happens to an overage agreement after the deal has been done. How could my auctioneer, let alone the charming house sales negotiator, have known whether my land would have been worth more, on account of something so nebulous as the possibility of planning consent? What is more, even with the best advice in the World, the range of financial possibilities is vast. What exactly could these people have advised about? It may also be important to note that the auctioneer is unlikely to be able to charge a commission in five or ten years’ time, if the overage does become valuable.
Now consider the solicitor. Frankly, she does not draw an overage agreement every day. Her recourse when her instructions were confirmed me, would have been to look for a standard template (she would call it a “precedent”). She would use the only one, single overage agreement listed on the wide range of documents supplied to her firm at gigantic cost from one of two very large suppliers. The 50% point is probably not in her precedent document, but everything else is. This template was probably based on earlier versions dating back many years - certainly long before the current large rise in the value of land with PP. Of course the template was up to date in terms of the law, but the lawyers who studiously maintain such documents up-to-date are not experts in property prices, or planning practice. They are experts in law.
So my solicitor edits her template and inserts “50%” and off it goes to the auctioneer. The auctioneer would be dead in the water if he questioned the solicitor’s contract, let alone edited it. So that becomes the auction contract.
Why was any of that wrong?
It is difficult to fault either the auctioneer or the solicitor who drew my agreement. Neither has any idea what will happen to the land through successive ownerships. The concern of both is to protect their client’s interest as they see it. The solicitor does so by maximising the overage percentage and the period over which it will bite. The auctioneer does so by selling the land at the best price obtainable on the day, in the room.
However, at the bottom of the ivory tower, down here in the real world, the seller will receive no overage - not ever, ever, ever, unless some buyer, sometime, decides to obtain planning consent for a high value use. So if the buyer simply tacks the land onto his house and uses it to graze horses, or sets up a garden centre, the seller’s dream of riches is shattered. If he is an optimist, he might treat it as an early contribution to his great grandchildren’s pension fund. More likely, he will decide after a few years that he will never win - and put the overage right alone into another auction sale, when it will realise a very small sum. After all, it is pure speculation on the part of the buyer.
What the auctioneer should do to maximise the seller’s long term profit is to consider what class of possible buyers is most likely to pay the highest price and market to that class. Unfortunately, the auctioneer gets paid for selling today, at auction. That is the basis of his contract with the seller. There is nothing in it for his firm five or ten years down the line. So there is no reason why he should do more than make a suggestion to his client that he should consider an overage.
I have no sympathy with the solicitor however. Simply to pick up a precedent and bang it off to the auctioneer is not good enough. She should have considered the effect of the agreement and how best to help her client. Instead, she took the narrow view that if the auctioneer did not make specific points, she need not do so either. As with the auctioneer however, her excuse would probably have been that forecasting the future is not what solicitors do.
So far, I have discussed only the fact of using an overage agreement or not, in general terms. In my article "key provisions to make money" I will tell you what terms make a difference and how the professional advisors could have helped their client to double his money through a near-term overage.