Overage 1: A good idea for seller?
What are my options?
The term "overage" covers a variety of different concepts. Here I will explain and comment only on the strategy whereby a seller of land which might one day "go for" housing or other valuable development, is sold subject to a bonus payment - the “overage” to the seller at any future time when any future buyer obtains planning permission (“PP”) which increases the value of that land.
Let me give you an example. I own a five acre paddock. I see that land values are fast appreciating. I want to sell my land but I hesitate because I am pretty sure it will be worth more next year. In fact, looking ten years ahead, I am quite certain that the value will have increased at least with inflation. My options are:
- sell now and take whatever the land is worth in its present condition today.
- pay a planning expert and team of specialists to obtain planning permission now (or fail and lose my money).
- hold onto the land until next year.
- sell now subject to an overage and hope some day, someone else will obtain planning permission, increase the value of the land, and pay me a proportion of the uplift.
Which of these options I select depends on:
- the advice I get from my land agent or solicitor - or both.
- how urgently I need cash and whether I really need all of it immediately.
- how soon I rate the chance of a future uplift.
- What effect I think an overage agreement will have on the price I get for my land.
So you see, the permutations multiply. Going back ten to fifteen years, the chance of getting PP anytime soon was remote. I would probably have considered an overage payment to be something for my pension - or even my children’s pensions. But that has now changed. It is still very difficult to get PP but the rewards are far greater. Even the most remote site outside the village settlement could be a candidate.
So there are many variables and calculations I must consider before I make up my mind.
What advice do I get?
Although overage agreements have been around for many years, it is only since 2012 that the increase in the price of residential property has resulted in substantial profit for converting a field into a site for five houses. I have seen new houses appear on sites I would never have imagined would be allowed. I really do not want to miss out on this boom. I would like a couple of £million too. Just possibly my field could “go for housing”. I will go and talk to my land/estate agent. She sells a lot of houses so she should know.
After 30 minutes with her, I am not so sure. She tells me how well she can sell the land and how easy it will be to sell, but when I mention a planning application, she just tells me it will cost a great deal of money and my land is not designated for development in the local plan. She mentions that she could sell it by auction too - to make sure the best price would be paid. Only later, I learn that selling by auction means she joins a well known auctioneer who will sell it and pay her part of the commission. That is not really what I had in mind. I will play it ruthlessly and go to the auctioneers directly. I might get a better deal.
The auctioneer’s office is very busy. They deal with me on the phone and I am left feeling that a meeting to explain everything and advise me is not possible. However, the energetic young guy I talk to does tell me that “lots of people use an overage agreement” for land like mine. He confirms what I already knew - I would sell now for a decent price and if ever anyone got PP, I would get a share of it. He said 50% was usual.
Selling my land
He also pointed out that my land was really not far from other development and suggested it might “come” within a few years. However, right now all I owned was a small field so the auctioneer would not be able to describe it in any way associated with development potential. I would have to look for a longer term possibility of a profit.
I pretty much agreed to let them put my land into the next sale with an overage agreement. The man I saw recommended a solicitor who “knew about these things” and told me he could instruct him.
Two days later a very civil solicitor rang and explained that the auctioneer was not in a position to instruct her for me but that she would be happy to act for me if that was what I would like. I agreed and we discussed the terms of the sale. She said an overage clause was not a problem and asked my what overage I wanted. Of course I had no idea how that would affect my sale. That 50% had stuck in my mind and seemed very attractive. I decided on 50%.
I went along to the auction, full of excitement of course. The auctioneer had spoken the phone two days earlier and had suggested I should not be greedy because a well priced lot would attract more attention from buyers than something on the high side.
Some lots sold for £millions, a few stuck. My land had a guide price of £70,000. The bidding started slowly, then just three bidders were on their own. Eventually it was knocked down for £75,000. I was slightly disappointed, but the land was sold, so that was that. After the sale I found the buyer and introduced myself. He told me excitedly that he was going to set up a small garden centre on my land for himself and his family. He said he had great expectations in buying my land because “developers would not be interested in land with such a tough overage deal”. I had no idea why my overage contract should be tough. I decided to look into it. If you would like to know what I discovered, read my next article - "profit lost for ever"