Overage Agreements: the stuff of dreams
Only the right buyer will pay
Although overage agreements have been around for many years, it is only since 2012 that the increase in the price of land with planning permission for residential development has increased so much that every seller wants to be sure that his “hope” value is converted to an extra couple of noughts on his sale price. Unfortunately, the way this has happened has turned into what will be a “perfect storm”.
The problem is that the solicitor who draws the agreement has no idea what will happen to the land through successive ownerships. His only concern is to protect his client’s interest as he sees it. (I am a solicitor, so I understand this.) He does this by maximising the overage percentage and the period over which it will bite.
We have not yet seen an overage of 99% for 1,000 years but there have been some near misses! 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, some time, 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, the seller can only dream about his overage. If he is an optimist, he might treat it as an early contribution to his great grandchildren’s pension fund.
What the seller and the solicitor should do to maximise the seller’s profit is to consider what sort of buyer is most likely to obtain the planning permission which will trigger the overage, and what is required to entice that buyer to buy the land. That entails using an agreement which does not run for ever and which is enticing to a dealer or developer who might have to invest £60,000 at risk, even for a one acre paddock.
Continuous overage is a mortgage killer
The second problem is the continuity over years. It is not just about “How many years?” It is about any years at all. Suppose you go to an auction and buy a small paddock for a couple of horses. You have bought it subject to an overage condition of 50% for 25 years. You did ask your solicitor about this and she did make clear that if you were to obtain planning permission for anything at all, then half of the increase in value would immediately be payable to your seller.
Since all you wanted was to put up a stable, that did not appear to affect you. However, 10 years later your personal circumstances change entirely and you have to move away from the area. House has to be sold. Horses and paddock have to be sold.
As it happens, there has been further development in your area and you have been advised that your paddock could be worth £500,000. Well, you bought subject to the overage, so now you’re stuck with it. You could do with the money – even half of it.
You can’t afford the cash or the risk in applying for planning permission yourself so you find a good estate agent and your paddock is on the market. To your great disappointment, you can’t find a buyer. Your agent is disappointed too. You want answers. After research, she calls you to explain that whether your paddock is sold to a self builder or a small commercial builder, that person cannot obtain a mortgage, or bank lending, for construction, unless they can show that they have ready cash to pay off the overager as soon as they have planning permission.
Obvious really. If you are a lender, it’s not simply a question of money. There is also a security risk. They just do not want the problems that could be associated with the overager. There may be no problem, but the computer which calculates the risk has not been programmed to include overage payments.
So, to go back up the chain: the building society will not lend, so no buyer can buy the new house, so no builder wants to buy it, so the land owner will never receive his overage. Why cannot solicitors see this?
There is a simple way out of this. The original seller should fix the terms of the overage agreement so as to attract the buyer who is most likely to obtain the planning permission and trigger the overage payment. There are several elements to consider.
Limit the overage to the first full bite at the cherry
In other words, if the buyer obtains consent for any of several specified uses, like residential, or supermarket, that is the end of it. The seller gets his yummy payment and everyone is happy. It would of course be possible to vary the overage percentage or amount according to the use granted in the consent.
Maybe use a fixed sum overage
A variation on the above deal would be to pre-determine the sum due to the seller when consent is forthcoming. That eliminates valuations and arguments completely. In that case, the agreement simply provides for a fixed sum to be paid on the happening of whatever the seller decides. You can easily provide for that sum to be increased with time or fixed by reference to an index.
Make the buyer commit his money
This variation is a way to exclude buyers who are not interested in raising the value of the land by obtaining planning permission. Very simply – it is a term of your sale contract that the buyer must be prepared to spend, say £25,000 in out of pocket costs in making the application. That way, he will be well incentivised to try hard - and of course only serious contenders will be interested. The downside is a risk that if no prospective developer is interested you will not sell at all.
Overage must be a share of profit, not of the increased value
My last suggestion is about the calculation of the overage. In many overage agreements, the terms are defined so that the overage is payable on the difference between what is effectively the purchase price of the land, on the one hand, and the value with planning permission on the other hand.
No account is taken of the enormous (and often ridiculous) sums that have to be spent on experts reports on everything from looking for 15th century cannon balls to building bat roosts just in case a few want a spring holiday. In a recent appeal case, the inspector counted 19 reports or submissions made by the appellant. So, if the buyer foresees problems and the possibility of a large “spend”, he may find that a 50% overage calculates out at 80% of the true profit. So that is another deal he will stay well clear of.
The changes I have suggested are not new. Such provisions are agreed every day in conditional sale agreements and option agreements, but no-one seems to have considered using them in an overage agreements. Many solicitors are mesmerised by their standard precedent, draw in another age for different circumstances, but fall back on it for lack of understanding of the nature of the beast without considering their client’s true interest.
Do not be fooled by a local authority
To complete this article, I will mention just one more point: assignment of buyer’s rights to receive overage. Suppose your overager is your local authority. Most local authority overage agreements state this right explicitly, but even if unstated, the right would exist. So when a local authority overager-seller answers pre-contract enquiries with the reply that “they” will of course not pursue a house owner who wants a modest extension in ten years’ time, they are being naiive or ignorant. Their estates department will in due course sell a portfolio of overage agreements to a private sector buyer. The first action by the buyer will be to inspect every site and plot and house and come up with a charge to overage for every greenhouse, solar panel and windmill he can find.
You can find a template for an overage agreement which I have drawn for Net Lawman Ltd at https://www.netlawman.co.uk/dl/overage.